DISCLAIMER: THE INFORMATION CONTAINED HEREIN IS SOLEY FOR EDUCATIONAL PURPOSES. IT IS NOT LEGAL ADVICE OR LEGAL AUTHORITY AND IS ONLY THE AUTHOR’S INTERPRETATION OF BUSINESS LAW.
As a business attorney, one of the first and most important questions I help clients answer is:
What type of business entity should I form?
The structure you choose affects everything from taxes and liability protection to management flexibility and long-term growth. Understanding the differences between common business structures can help you make informed decisions that protect both your business and your personal assets.
Below is an overview of the most common business entities and the key benefits of each.
Sole Proprietorship
A sole proprietorship is the simplest business structure and is often used by individuals just starting out.
Key Features and Benefits:
- Easy and inexpensive to form
- Minimal ongoing formalities
- Owner has complete control over the business
- Income is reported directly on the owner’s personal tax return
Considerations: The major drawback is that there is no liability protection. The owner is personally responsible for all debts, contracts, and legal claims against the business.
Partnership (General and Limited)
Partnerships involve two or more individuals or entities conducting business together.
General Partnership Benefits:
- Simple formation
- Shared management and resources
- Pass-through taxation (profits taxed at the partner level)
Limited Partnership Benefits:
- Allows passive investors to limit their liability
- Useful for certain investment or real estate ventures
Considerations: In a general partnership, each partner can be personally liable for the actions of the other partners. A well-drafted partnership agreement is essential to address decision-making, profit sharing, and exit strategies.
Limited Liability Company (LLC)
The LLC is one of the most popular business structures for small and mid-sized businesses.
Key Features and Benefits:
- Limited liability protection for owners (members)
- Flexible management structure
- Pass-through taxation by default, with options for different tax treatment
- Fewer formalities than corporations
Why Attorneys Often Recommend LLCs: LLCs strike a balance between liability protection and operational flexibility, making them suitable for many types of businesses, from startups to established companies.
Corporation (C-Corporation)
A C-Corporation is a separate legal entity owned by shareholders.
Key Features and Benefits:
- Strong liability protection for owners
- Ability to raise capital through stock issuance
- Perpetual existence independent of ownership changes
- Well-understood structure for investors and lenders
Considerations: C-Corporations are subject to corporate taxation, and shareholders may also be taxed on dividends—commonly referred to as “double taxation.” They also require more formalities, such as annual meetings and detailed record-keeping.
S-Corporation
An S-Corporation is a tax election, not a separate type of entity, and is available to qualifying corporations and LLCs.
Key Features and Benefits:
- Pass-through taxation, avoiding double taxation
- Limited liability protection
- Potential payroll tax advantages for owner-employees
Considerations: S-Corporations have strict eligibility requirements, including limits on the number and type of shareholders. Not all businesses qualify.
Choosing the Right Structure
There is no one-size-fits-all answer. The best business structure depends on factors such as:
- The level of risk of liability
- Tax considerations
- Number of owners
- Plans for growth or outside investment
- Management preferences
- Business purpose
Selecting the wrong structure can lead to unnecessary taxes, personal liability exposure, or operational limitations.
Why Legal Guidance Matters
Forming a business involves more than filing paperwork. An experienced business attorney can help you:
- Evaluate the pros and cons of each entity
- Draft governing documents that protect your interests
- Ensure compliance with state and federal laws
- Plan for future changes, such as adding partners or selling the business
If you are starting a new business or considering restructuring an existing one, consulting with a business attorney is a smart investment in your company’s long-term success. The reality is that early legal guidance is not a luxury—it’s a smart investment in your business’s long-term success. Choosing the right structure at the outset can save significant time, expense, and legal trouble down the road. The decisions you make today will shape your business for years to come.
About the Author
Patrick J. Sullivan
Adams & Sullivan, PC, LLO
Mr. Sullivan has been practicing law for more than 30 years in the greater Omaha area and has helped more than 300 LLCs and 500 Corporations. He graduated from the Nebraska School of Law in Lincoln, Nebraska and was admitted to practice law in Nebraska in 1994 and in Iowa in 2012. Mr. Sullivan’s practice focuses on business law, including formation of corporation/limited liability companies and buying/selling of ongoing businesses and general business issues.
His practice also includes real estate transactions, both residential and commercial ranging from buying/selling, new development, condemnations, and representation of sanitary and improvement districts. Mr. Sullivan also practices extensively in estate matters including probate, trust formation and administration.