How to Choose the Best Legal Structure for Your Business

Table of contents.

what is a legal structure in a business plan

Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued ]

We’ll explore business legal structures and how to choose the right structure for your organization. 

What is a business legal structure?

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Why is a business legal structure important?

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

  • Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
  • Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
  • Paperwork: Each business legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a business partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
  • Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies . Other structures lack this closure protection.
  • Registration: A business legal structure is also a prerequisite for registering your business in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a business structure.
  • Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
  • Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your business structure in the future. However, changing your business structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your business. 

If you have to expand your business to another state , you won’t have to create a new company or structure, but you may have to register it as a “foreign entity.”

Types of business structures

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

Sole proprietorship

A sole proprietorship is the simplest business entity. When you set up a sole proprietorship , one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases , office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers , cleaning service providers and babysitters.

A sole proprietorship business structure has several advantages.

  • Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
  • Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
  • Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions , such as a health insurance deduction.
  • Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a day care center and wish to fold the business, refrain from operating the day care and advertising your services.

The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses. These are a few examples:

  • Marriott Hotels

Partnership 

A partnership is owned by two or more individuals. There are two types: a general partnership, where all is shared equally, and a limited partnership, where only one partner has control of operations and the other person (or persons) contributes to and receives part of the profits. Partnerships can operate as sole proprietorships, where there’s no separation between the partners and the business, or limited liability partnerships (LLPs), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner – like running a restaurant or agency together,” Sweeney said. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made as well as those actions made by your business partner.”

General partnership costs vary, but this structure is more expensive than a sole proprietorship because an attorney should review your partnership agreement. The attorney’s experience and location can affect the cost. 

A business partnership agreement must be a win-win for both sides to succeed. Google is an excellent example of this. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading global search engine. The co-founders met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 11.4% of Google provides them with a total net worth of nearly $226.4 billion.

Business partnerships have many advantages. 

  • Easy formation: As with a sole proprietorship, there is little paperwork to file for a business partnership. If your state requires you to operate under a fictitious name ( “doing business as,” or DBA ), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. You’ll usually need a business license as well.
  • Growth potential: You’re more likely to obtain a business loan with more than one owner. Bankers can consider two credit histories rather than one, which can be helpful if you have a less-than-stellar credit score.
  • Special taxation: General partnerships must file federal tax Form 1065 and state returns, but they do not usually pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, affecting each partner’s business share and contribution. If you brought the most seed capital for the business, you and your partner may agree that you’ll retain a higher share percentage, making you the majority owner.

Partnerships are one of the most common business structures. These are some examples of successful partnerships:

  • Warner Bros.
  • Hewlett-Packard
  • Ben & Jerry’s

Limited liability company 

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying a partnership’s tax and flexibility benefits. Under an LLC, members are shielded from personal liability for the business’s debts if it can’t be proven that they acted in a negligent or wrongful manner that results in injury to another in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

According to Wolters Kluwer , the cost of forming an LLC comprises the state filing fee and can vary depending on your state. For example, if you file an LLC in New York, you must pay a $200 filing fee, a $9 biennial fee, and file a biennial statement with the New York Department of State .

Although small businesses can be LLCs, some large businesses choose this legal structure. The structure is typical among accounting, tax, and law firms, but other types of companies also file as LLCs. One example of an LLC is Anheuser-Busch, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Here some other well-known examples of LLCs:

  • Hertz Rent-a-Car

To learn more about LLCs, read our LLC tax guide , our comprehensive overview of starting an LLC , and our guide to creating an LLC operating agreement.

Corporation 

The law regards a corporation as separate from its owners, with legal rights independent of its owners. It can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. 

There are several types of corporations, including C corporations , S corporations, B corporations, closed corporations, and nonprofit corporations.

  • C corporations: C corporations, owned by shareholders, are taxed as separate entities. JPMorgan Chase & Co. is a multinational investment bank and financial services holding company listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies – including Apple, Bank of America and Amazon – file for this tax status.
  • B corporations: B corporations, otherwise known as benefit corporations, are for-profit entities committed to corporate social responsibility and structured to positively impact society. For example, skincare and cosmetics company The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
  • Closed corporations: Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility than publicly traded companies. For example, Hobby Lobby is a closed corporation – a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; instead, the stocks have been allocated to family members.
  • Open corporations: Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motor Co., are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
  • Nonprofit corporations: Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These organizations all focus on something other than turning a profit.

Corporations enjoy several advantages. 

  • Limited liability: Stockholders are not personally liable for claims against your corporation; they are liable only for their personal investments.
  • Continuity: Corporations are not affected by death or the transferring of shares by their owners. Your business continues to operate indefinitely, which investors, creditors and consumers prefer.
  • Capital: It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This structure is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative, rate. Additionally, your business could file as an S corporation for the tax benefits. Once your business grows to a certain level, it’s likely in your best interest to incorporate it.

These are some popular examples of corporations:

  • General Motors
  • Exxon Mobil Corp.
  • Domino’s Pizza
  • JPMorgan Chase

Learn more about how to become a corporation .

Cooperative 

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits.

Cooperatives offer a couple main advantages.

  • Increased funding: Cooperatives may be eligible for federal grants to help them get started.
  • Discounts and better service: Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation (e.g., Inc. or Ltd.). The filing fee associated with a co-op agreement varies by state. 

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS reported a net income of $422.4 million for fiscal year 2020. These are some other notable examples of co-ops:

  • Land O’Lakes
  • Navy Federal Credit Union
  • Ace Hardware

The five types of business structures are sole proprietorship, partnership, limited liability company, corporation and cooperative. The right structure depends mainly on your business type.

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. Consider your startup’s financial needs, risk and ability to grow. It can be challenging to switch your legal structure after registering your business, so give it careful analysis in the early stages of forming your business. 

Here are some crucial factors to consider as you choose your business’s legal structure. You should also consult a CPA for advice.

Flexibility 

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. [Learn how to write a business plan with this template .]

When it comes to startup and operational complexity, nothing is more straightforward than a sole proprietorship. Register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means creditors and customers can sue the corporation, but they can’t gain access to any personal assets of the officers or shareholders. An LLC offers the same protection but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, principal at Rivetr. “The LLC structure prevents that and makes sure you’re not taxed as a company, but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the effect on your return. 

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as those for Social Security and Medicare, on your personal return. 

To simplify payroll complexities and taxation issues, consider using a payroll service. Check out our reviews of the best payroll services to find a partner that fits your needs and budget.

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding from an investor, venture capitalist or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can obtain funds only through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it’s not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here apply only to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

Max Freedman and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

thumbnail

  • Best CRM Software for Nonprofits

thumbnail

Building Better Businesses

Insights on business strategy and culture, right to your inbox. Part of the business.com network.

Types of Business Structures Explained

' src=

13 min. read

Updated January 5, 2024

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is significant.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

  • Sole proprietorship

The simplest business structure is the sole proprietorship. If you don’t create a separate legal entity, your business is a sole proprietorship. 

The main advantage of the sole proprietorship is that it’s relatively simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and business assets. If you’re sued or your business folds—your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

A sole proprietorship is ideal for self-employed individuals like personal trainers offering individual coaching or artists selling unique items on platforms like Etsy.

Key considerations

  • Cost-effective setup: The primary expense is usually the DBA (“doing business as”) registration. Some states may require public notice, like a newspaper ad. Generally, the total cost is below $100.
  • Simplified taxation: Sole proprietorships are “pass-through” tax entities. Profits and losses are reported directly on the owner’s taxes, necessitating only a few additional tax forms if you’re the sole worker.
  • Hiring employees is possible: Being a “sole” proprietor doesn’t restrict hiring. If you employ others, tax processes become slightly more intricate.
  • Limited ways to raise funding: You can’t sell company stock, limiting fundraising avenues.
  • Potential loan difficulties: Banks might hesitate to grant loans to sole proprietorships due to perceived credibility issues.
  • Full personal liability: If the business faces debt or legal issues, your personal assets, including your home, car, and savings, are vulnerable.

Dig deeper:

Should you register as a sole proprietorship?

Explore the pros and cons of incorporating as a sole proprietorship.

How sole proprietorships are taxed

Understand how registering as a sole proprietor impacts your taxes.

Brought to you by

LivePlan Logo

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

  • Partnerships

Still a relatively simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll contribute to the business in some way and share in profits and losses.

Partnerships are harder to describe because they change so much. State laws govern them, but the Uniform Partnership Act has become the law in most states. That act, however, mainly sets the specific partnership agreement as the real legal core of the partnership so that the legal details can vary widely.

Usually, the income or loss from partnerships passes through to the partners without any partnership tax. The agreements can define different levels of risk, which is why you’ll read about some partnerships with general and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners and liquidation arrangements if necessary.

What are the types of partnerships?

  • General partnership: Assumes equal involvement of all parties in profits, liabilities, and duties. Any intentional imbalance should be specified in the partnership agreement.
  • Limited partnership: Suited for partners in an investor role with limited involvement in daily operations. This structure is more complex and less common.
  • Joint venture: Designed for a single project or a limited duration, operating similarly to a general partnership.

Who is a partnership for?

A partnership is similar to an extended sole proprietorship and is ideal for two or more individuals wanting to start a business jointly. 

To make the partnership more effective, you and your partners should have skillsets, connections, or other unique benefits that complement each other. 

For example, a personal trainer and nutritionist building an online fitness program. One entrepreneur has experience building an exercise regiment with clients. The other understands how to create balanced meal and supplement recommendations. 

They have unique but complementary knowledge that, when combined, creates a more valuable product/service.

  • Partnership agreement: While not mandatory, it’s advisable to draft a partnership agreement, ideally reviewed by legal counsel, to clarify roles and responsibilities, ownership, and what will happen if a partner wants to leave the partnership.
  • Tax implications: Partnerships are “pass-through” entities, meaning profits and losses are directly passed to the partners. Refer to the IRS for partnership tax details.
  • Additional costs: Since it’s a good idea to have a lawyer look over your partnership agreement, don’t forget to factor in this added expense.
  • Trust in partnership: Ensure your partner is trustworthy, as partners share responsibility for business decisions and debts. A well-drafted partnership agreement can prevent future conflicts.

How to create a business partnership agreement

Even if you’re not in an official partnership, you should consider drafting a partnership agreement. Doing so will clearly define rights and responsibilities and help you amicably resolve any disputes.

How partnerships are taxed

Understand how registering as a partnership impacts your taxes.

Plan for changes with a buy-sell agreement

What will you do if you or your partner quits, sells their portion of the business, or passes away?

How to find the right business partner

A partnership is more than a legal structure. It’s a relationship between entrepreneurs who share a passion for an idea and bring unique skill sets. So, how do you find the right person to make your partnership thrive?…

Traits to look for in a business partner

What makes a good business partner? If you’re considering someone with the following traits, you likely have a good fit.

How many partners should you have?

What’s the ideal number of business partners? The right mix of people and skillsets can lead to tremendous business growth. But too many may lead to disaster.

What to do when your business partner is your life partner

Should your significant other be your business partner? Learn your legal options and how to find the right ownership fit for your business and relationship.

  • Limited liability company

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation. It offers a combination of some limitations on legal liability and some favorable tax treatment for profits and transfer of assets.

Who is a limited liability corporation for?

An LLC is ideal for those wary of personal liability in business. If you possess significant personal assets or operate in a lawsuit-prone industry—an LLC safeguards your personal finances. 

  • Complexity: While offering more protection, an LLC is harder to establish than a sole proprietorship or partnership.
  • Tax benefits: LLCs maintain “pass-through” tax status, meaning you’re taxed only on your profit share, which is reported on personal taxes. 
  • Single-member LLCs: Most states allow single-person LLCs, making it a potential alternative to sole proprietorships.

How to form a limited liability company

Interested in forming an LLC? Here are the steps you’ll need to take.

How to create an LLC operating agreement

Set the rules for how your LLC will operate, including the management structure, individual responsibilities, ownership percentage, and other important information.

LLC costs and fees explained

Make sure you’re aware of all the costs and fees associated with forming an LLC.

How LLCs are taxed

Understand how registering as an LLC impacts your taxes.

  • Corporations

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Who is a corporation for?

Corporations are best suited for larger, established businesses with multiple employees, plans for rapid scaling, or intentions to trade or attract significant external investments publicly. A corporation might not be the right choice if you’re a small business owner or work with a small team.

What are the types of corporations?

C corporation.

What we typically think of when we refer to corporations, where all shareholders combine funds and are then given stock in the newly formed business. 

A C corp is a separate tax entity, meaning your business can deduct taxes. It also means that earnings can be taxed twice, as they are concerning your business and your personal taxes if you take income as dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation

An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return without being taxed separately first.

In practical terms, the owners can take their profits home without first paying the corporation’s separate tax on profits. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state and then request S corp status. The IRS instructions for Form 2553 (which you’ll need to file to become an S corp) can help you determine if you qualify.

B corporation

Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might consider becoming a B corporation, which stands for “benefit corporation.” 

However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s a C corp vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in ownership—with a nonprofit, no owners or shareholders exist. A B corp, which is still a type of corporation, still has shareholders who own the company. So, a B corp has a social mission but is still a for-profit company (as opposed to a nonprofit) with an end goal of returning profits to the shareholders.

  • Liability: Corporations offer the most protection for personal assets.
  • Capital raising: The ability to sell stock enhances investment potential.
  • Taxation: Corporate taxes are separate (except for S corps), but the structure can lead to double taxation, especially for C corporations.
  • Complexity: Establishing a corporation is more intricate than other business structures, requiring more paperwork and formalities.

How to form a corporation

Follow these ten steps to incorporate as a C, S, or B corporation.

How are corporations taxed?

Understand how registering as a corporation impacts your taxes.

S corporation basics

Should you choose an S corp as the legal structure for your business? Learn the basics and what alternatives are available.

B corporation basics

Should you choose a B corp as the legal structure for your business? Check out this detailed overview of how this business entity functions and the pros and cons you’ll contend with.

A nonprofit is a “not-for-profit” business structure, meaning the business does not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

Nonprofits cater to those with missions centered on charitable, educational, scientific, or religious purposes. Examples include homeless shelters, conservation groups, arts centers, and educational institutions.

What’s the difference between a nonprofit and a cooperative?

Like a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders but toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs because the members own it, referred to as “user-owners.”

If you plan on organizing your business to be democratically owned, looking into the cooperative business structure might be a good idea to look into the cooperative business structure .

  • Complex setup: Establishing a nonprofit requires steps similar to forming a corporation, including filing articles of incorporation, creating bylaws, and organizing board meetings.
  • Fundraising will be your main priority: Nonprofits generally rely on fundraising and grants to keep a flow of income into their business.

What is a nonprofit corporation and how to start one

Learn the basics of setting up a nonprofit corporation.

How to earn income as a nonprofit corporation

Learn how related and unrelated business activities can generate revenue for a nonprofit corporation.

  • Making your business legally compliant

Choosing a business structure is the first legal step you’ll take. Your choice will impact your taxes, fundraising, and personal liability. 

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I strongly recommend working with an attorney to review the details of your company’s legal establishment and licensing. The trade-offs involved in incorporation versus partnership versus other structures are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. In this regard, the cost of simple legal advice is almost always worth it. Don’t skimp on legal costs.”

TLDR: Take time, carefully weigh your options, and consult a legal professional.

Once you’ve chosen, check off the remaining legal requirements to start a business. While you can complete most of these in any order, here are a few suggestions.

  • Apply for a federal and state tax ID
  • Obtain licenses and permits
  • Register your business name

Clarify your ideas and understand how to start your business with LivePlan

Content Author: Kody Wirth

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

what is a legal structure in a business plan

Table of Contents

Related Articles

what is a legal structure in a business plan

17 Min. Read

Legal requirements for UK-based businesses

what is a legal structure in a business plan

3 Min. Read

How to apply for a federal tax identification number

what is a legal structure in a business plan

4 Min. Read

what is a legal structure in a business plan

9 Min. Read

How to register your business name

The LivePlan Newsletter

Become a smarter, more strategic entrepreneur.

Your first monthly newsetter will be delivered soon..

Unsubscribe anytime. Privacy policy .

LivePlan pitch example

Discover the world’s #1 plan building software

what is a legal structure in a business plan

Contact us whenever you need it!

+1 855 997 0206

Contact Hours: Sun-Sat 8am - 10pm ET

  • Legal Structure of a Business
  • LawDistrict ❯
  • Legal Dictionary
  • What Is a Legal Structure?

A legal structure is an organizational framework for how a business entity operates . Also called a business structure, a business form, or a business ownership structure, the proper legal structure depends on the size and type of your business and your business goals.

Typical business legal structures include sole proprietorships , limited liability companies ( LLCs ), partnerships (such as LLPs ), and corporations .

  • How Do I Choose the Right Legal Structure?

Different legal structures come with distinct advantages and disadvantages. In most cases, the criteria you will evaluate to select the right format involve the following:

  • owner liability
  • expenses and procedures needed to create and run the business structure
  • how the business will be taxed
  • investment needs

Owner liability : The more risk involved with the service or product your business provides, the more important owner liability becomes.

Both corporations and LLCs offer business owners some personal liability protection against someone making claims against the business. In fact, this protection is one of the main benefits of an LLC. Conversely, owners of partnerships and sole proprietorships have little personal protection.

Expenses and procedures : Sole proprietorships and partnerships do not require much in the way of fees and documents to start a business . Partnerships do need to create a partnership agreement that specifies who does what in the company.

However, you must file articles of incorporation with your secretary of state's office and pay associated fees to establish a corporation or an LLC. Required fees and forms, such as an LLC operating agreement , vary from state to state.

In addition, the owners of businesses with these two business structures must elect officers to elect to run the company and maintain detailed records of any critical business decisions.

Taxes: The business structure you choose also affects your income tax status . Sole proprietorships, partnerships, and LLCs are "pass-through" tax entities, meaning the taxes on business profits and losses "pass through" to the owners on their personal income taxes. However, these owners must file taxes on all net profits from their business, even if they take no money out of the company during the tax year.

Unlike the "pass-through" structures, corporations are considered separate tax entities. These business owners pay taxes only on the profits they actually take from the business in the form of salaries, dividends, or bonuses. Also, the corporation pays taxes at a lower tax rate than some individuals do.

Investment needs: If your business relies on investors, then a corporation may be the right business structure. Structuring as a corporation allows a company to sell shares of ownership through stock offerings. The previous business structures cannot offer stock.

Start Your Free Business Plan Template

FAQs About Business Structures

What about llc vs. sole proprietorship.

Deciding between an LLC and a sole proprietorship is a difficult choice when it comes to legal structure . Many entrepreneurs launch their businesses as sole proprietorships because they are easy and inexpensive to set up and maintain. All profits and losses "pass through" to the owner's personal tax return, and the owner does not need to pay business taxes.

However, a sole proprietorship is not considered a separate legal entity. Therefore, the owner has unlimited liability protection and can be held personally liable for the obligations of the business.

As their businesses grow, many sole proprietors restructure their businesses as LLCs , which offer the pass-through tax advantage and limited liability protection.

Is a business plan essential?

A well-thought-out business plan serves as a guide for launching and managing your business and choosing its legal structure . When you go through the steps of how to write a business plan , you'll be able to see more clearly what legal structure you'll need for your endeavor.

Traditional business plans use a standard structure and offer details on each aspect of the business. A lean startup business plan uses the same structure but summarizes the key elements.

Depending on your type of business and the structure you choose, you may need to apply for a business registration number . You will use this number to file taxes, open up a bank account, and conduct other official business.

Create a Customizable Legal Form Now

Get 7 Days Total Access to Our Entire Catalog!

Sole Proprietorship

Partnership, limited liability company (llc), corporation, templates and examples to download in word and pdf formats, how to choose the best legal structure for your business.

Deciding on a specific type of legal structure when you've just started your business journey can be complicated. It's hard to know exactly what the differences are, how the different structures can benefit you, and what any risks might be.

Luckily, it doesn't have to be so complicated! In fact, we've published this guide on everything you need to know about choosing the right legal structure for your business to help you along the way.

The most common business structures are sole proprietorships, partnerships, limited liability companies, and corporations. Here, you'll learn about each one in detail to help you choose the right fit for your business, as well as a non-profit, which you might consider for a new charitable business.

What type of structure you choose will make a big difference over the life of your business. It can have significant tax implications, as well as implications for your personal level of risk. It is not a decision that should be made lightly.

Below, we examine each common business structure in detail.

A sole proprietorship is the simplest type of business structure and the easiest to form and maintain. A sole proprietorship is basically a business that is you - and you are the business! For example, if you were a freelance writer on the internet and wanted to operate as a sole proprietorship, you wouldn't have to do anything at all to already be up and running, as long as you wanted to operate under your name.

In a sole proprietorship, no separate legal entity is created. If you'd like to operate under a special name, like a new business name or just a different name other than your own legal name, you would file what is called a "Doing Business As" (or DBA, as it is referred to) document with your state. All this document does is tell the state that you, as a legal person, are doing business under the name you've chosen for your business.

Because of the simplicity of the sole proprietorship, the way that your taxes are handled is also fairly simple. The taxes of the sole proprietorship would "pass through" to you, meaning you report any profit or loss on your own taxes and don't have to go through a separate process for the business.

One of the biggest drawbacks to a sole proprietorship is that you can be personally on the hook for any business liabilities - whether you make a big financial loss one year or whether your business gets sued. That's because in a sole proprietorship, there is no separation between you as a person and you as a business, so anything you own, in terms of assets, may be up-for-grabs by any creditors or the public to whom you are facing liability.

Another big drawback is that you may have a hard time raising any money. In a sole proprietorship, you can't issue stock in the company, so it could be hard to attract capital investors. You also may not have much success getting a bank loan, because banks generally don't favor lending to sole proprietorships.

How to form a sole proprietorship

To create a sole proprietorship, as mentioned above, you wouldn't have to file anything with your state other than a DBA, if you'd like. There can be fees associated with the DBA form, which vary per state. But keep in mind you might have separate documents to file, depending on your business. These could include special licenses or permits.

Why you might choose a sole proprietorship

A sole proprietorship is a good idea if you are a solopreneur with a small business and you are planning to keep it that way. It's very easy to form (you either have to file no documents or just one DBA) and you can get focused on starting your business right away. It's also very cheap to get started.

Especially if your business may not be facing a high level of risk, a sole proprietorship might be for you. A sole proprietorship wouldn't be recommended if, let's say, you ran a business that dealt with large amounts of other people's money on a regular business, or as a health professional, or really any area where the risk of being liable for something serious is high.

Final overview

Sole proprietorship benefits:.

1. It's cheap and easy to form.

2. Taxes are easy to keep track of.

3. You still have the option to have employees if you would like.

Sole proprietorship drawbacks:

1. There is a high level of personal risk for liabilities.

2. You may have difficulty raising funds.

If a sole proprietorship is the simplest business structure for an individual looking to operate their own small business, a partnership might be considered that for two or more people.

In a partnership, the two or more "partners," as they are called, each generally have a say in how the company runs (depending on the structure of the partnership) and each own a piece of the company, including its profits and losses.

In a partnership, you can also have different types of partners - general partners and limited partners - or you can have just a general partnership with all the same types of partners. General partners are equally responsible for everything: all the profits, any potential losses, any liabilities that might come up, and general responsibility for the company, including the amount of work done. Limited partners are those that are basically only partners for a financial reason, in that they invest but have not much else to do with how the company runs. Overall, partnerships with limited partners are a little rarer, as people like to go into partnerships with equal weight.

Imagine a situation where two people decide to open a yoga studio together. Their structure of choice may be a partnership.

A joint venture, formed with a Joint Venture Agreement , is a type of general partnership that only lasts for one specific project or a limited amount of time.

Joint venture is a generic term for any business relationship between two parties for a limited time. A joint venture could be for a brand new business, or just one marketing promotion, or even just a project between two already-formed businesses. In a joint venture, the parties could decide to form a temporary partnership, with a Partnership Agreement , but they don't have to: they can also retain their fully separate legal identities and just operate with a Joint Venture Agreement.

Taxes in a partnership can pass through, just like in a sole proprietorship.

The formation of a partnership, however, can be very complicated. Many states have adopted something called the Uniform Partnership Act, which makes the written Partnership Agreement very important. Partners will need to figure out everything from how they'll run the day-to-day business to what happens if the business folds or if someone wants to leave.

The Uniform Partnership Act is similar to a model statute or model law, in that it was drafted to be applicable uniformly, but states each had to individually adopt it. The Uniform Partnership Act, or UPA, gives guidance on how business partnerships should be formed, governed, and dissolved.

How to form a partnership

As mentioned above, the basis of partnership formation is the written Partnership Agreement, which sets out all of the details of the business relationship between the parties. Unless you also want to file a DBA, you won't need to file any partnership documents with your state.

Keep in mind, however, that as above, you may need specific licenses or permits for your particular business model.

Why you might choose a partnership

A partnership is a good idea if you are running a small business with another individual or a few individuals. As with a sole proprietorship, it's very easy to form (you either have to file no documents with the state or just one DBA) and you can get focused on starting your business right away. It's also very cheap to get started, just like a sole proprietorship.

If you're not sure of the trustworthiness of your potential partners, however, a partnership may not be the way to go for you, as you could be exposing yourself to a high level of risk just because of the actions of your partners. Either way, however, you should always have a well-written Partnership Agreement in place.

Partnership benefits:

1. It's relatively cheap to form.

2. Generally, unless you have a DBA, you won't need to file with the state.

3. Taxes pass through.

Partnership drawbacks:

1. The Partnership Agreement can be a complicated document.

2. It can be very risky if your partners are not trustworthy.

A Limited Liability Company, or LLC for short, has largely become the preferred form of structure for many small- to medium-sized businesses, and even for a lot of solo business owners. The reason for this is because it has a lot of benefits of other types of business structures, without as much of the risk.

In an LLC, there is a lot of customization available for how the business is run. LLCs can be used for small businesses or large ones. You can form an LLC just for yourself or have an LLC with many different members. The main benefit of an LLC is that your personal assets are shielded from liability - hence the name, "limited liability" company.

Taxes still pass through in LLCs. If you are a single-member LLC, the taxation is similar to a sole proprietorship. In a multi-member LLC, you are taxed on just your portion of the profits.

LLCs can, therefore, be formed for almost any purpose - for a single freelance artist or a group of people looking to open a bakery together, for example. LLCs can even be formed for professionals, like a legal or medical practice.

Since all business structures are formed according to the state, and not federal, government, the requirements to file and run the business, especially for the more complicated structures, can vary.

Forming an LLC is more complicated than either a sole proprietorship or partnership, as it involves filing specific documents in a specific form with the state.

How to form an LLC

An LLC is generally filed with your state by drafting Articles of Organization , the creation document for the company. Before this, you'll also have to ensure that you have a business name that will work by running a search on your proposed business name with your state's Secretary of State (usually this can be done easily on the Secretary of State website). An Operating Agreement is also a very good idea to have drafted (though it is not required), especially if you have more than one LLC member.

If you would like to operate under a special name for your LLC, you may also have to file a DBA.

Why you might choose an LLC

An LLC is a good idea when you want to have the maximum amount of liability protection for your business, either as a solo business owner or as part of a team and you don't want to build a corporation (more on that below). It's also a good idea if you still want the simplicity of taxation and the ability to organize your business as you like.

Whenever you file your LLC, make sure you keep all of the records separate to ensure your liability protection. Your organizational records, banking records, and, if applicable, personnel records all need to be records of the LLC specifically, not mixed in with your own personal records.

LLC benefits:

1. You are protected from personal liability.

2. Taxes pass through.

LLC drawbacks:

1. It's a little more expensive and complicated to form than a sole proprietorship or partnership.

2. Your liability is subject to the separateness of all of your records.

A corporation is generally the most complex legal structure , involving a lot of time and resources at its formation and then on through its life. A corporation is its own separate entity - often sometimes compared to a business version of a legal "person." In other words, the corporation is its own body separate and apart from you or any of the other owners, called "shareholders."

A corporation can take one of three main forms: the C corporation, the S corporation, or the lesser-known B corporation.

Most big companies in the United States, like Fortune 500 companies, are organized into a C corporation. It's the "traditional" corporate structure that people think of when they think of corporations. In a C corp, there are owners, called shareholders as noted above, who all put money into the business and receive shares, or stock, in return. The corporation gets taxed on its own - but so do any shareholder earnings, which means that with corporations, there is what's called "double taxation." All that means is that money into the corporation gets taxed as does money to the shareholders. In a C corp, there is almost no personal liability of the shareholders. Additionally, there is the possibility of the shareholders earning a lot of income if the corporation ever goes public.

The S corporation is a slightly different entity, similar to the C corp, but with the possibility of pass-through taxation. As discussed in the other business forms, what this means is that profits and losses can go straight to the owner or owners of the S corp, making it a good idea for small businesses. The S corp is a little more limited than the C corp in most states, however, as it can usually only be held by a certain limit of private individuals (for example, up to 25 owners that all have to be real people, rather than legal entities).

A B corporation is a lesser-known structure than the others and that's because it won't be applicable to most people. B Corps are designed for those that want to form essentially a C corporation but for some social good. The B stands for "benefit." A B Corp is very similar to a C Corp, except that sometimes the corporation receives certain tax breaks.

How to form a Corporation

Corporations are formed by filing a significant document covering the details of the corporation with the Secretary of State, called the Articles of Incorporation . Most corporations need to have a viable business name and go on to obtain a tax identification number from the Internal Revenue Service.

It's a good idea to also draft a document called the Corporate Bylaws , which set down the governing rules for the corporation.

Why you might choose a Corporation

You might decide to file a corporation if you are looking for a lot of growth potential for your business or if you knew you wanted to start bringing on shareholders right away. A corporation is a good idea if you plan to hire a lot of employees, as well.

It's probably not a good idea for very small business or individuals who don't plan to grow at a very high rate, as the expense of setting up and maintaining the structure, as well as the double taxation, would easily make it more cumbersome than its worth.

Corporation benefits:

2. Raising capital may be easier here than any other business form.

Corporation drawbacks:

1. It's more expensive and complicated to form than any other business form.

2. It's also complicated and expensive to maintain.

3. Double taxation may end up costing you more.

A non-profit is different than all of the other business structures - and the difference is in its name. Non-profits are created for a different reason than just generating profit; usually, the reason is some kind of social cause.

Non-profits are tax-exempt entities, and because of this, they need to have a specific purpose that is either charitable, religious, or educational.

How to form a Non-profit

Forming a non-profit requires Articles of Incorporation with the Secretary of State. You'll then need to file specifically to obtain tax-exempt status from both your state and the federal government.

If you plan to have multiple people in your non-profit, drafting Non-Profit Bylaws is a good idea.

Why you might choose a Non-profit

The option for a non-profit is really only there if you have a business that is for charitable, religious, or educational purposes. Once you decide that you do, then you must ensure you really aren't running a business for profit and that the primary purpose is for another reason. If those requirements are met, the non-profit is the best choice for you.

If you'd like to run a business for a social cause, but still want to have the main goal of earning a profit, a B corporation might be better suited to your needs. With a non-profit, one of the main activities will simply have to be fundraising to keep the business afloat. In a B corporation, however, you can do good and still turn a profit.

Non-profit benefits:

1. Tax-exempt status can be obtained.

2. It's the best structure for any primarily charitable business.

Non-profit drawbacks:

1. You must meet the requirements to open a non-profit.

2. Your business can't be run primarily to earn a profit.

When deciding what type of structure might be best for you, ask yourself the following questions:

1. How much time and effort am I willing to put in to set up the business at the beginning?

2. How much time and effort am I willing to put in to maintain the business over time?

3. Is pass-through taxation important to me?

4. What will be personal liabilities be?

5. Am I interested in easily raising capital?

Once you've asked yourself these questions, with the knowledge obtained from this guide, you'll be in a great place to decide what the best structure is for your needs.

About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.

  • Partnership Agreement
  • Articles Of Organization
  • Non-Profit Bylaws
  • Corporate Bylaws
  • Articles Of Incorporation

what is a legal structure in a business plan

what is a legal structure in a business plan

  • Business Plan Builder

Financial Forecasting

  • Canvas Modeling
  • Product Tour
  • Business Consultants and Advisors
  • Entrepreneurs And Small Businesses
  • Accelerators & Incubators
  • Educators & Business Schools
  • Students & Scholars
  • Sample Business Plans
  • business plan course

Strategic Canvas Templates

  • E-Books, Guides & More
  • Success Stories

Upmetrics AI Assistant: Simplifying Business Planning through AI-Powered Insights. Learn How

Upmetrics

  • 400+ Sample Business Plans

Business Plan Course

E-books, guides & more.

  • WHY UPMETRICS?

Customers Success Stories

Business planning, ai assistance, see how upmetrics works  →, stratrgic planning, business consultants, entrepreneurs and small business, accelerators and incubators, educators & business schools, students & scholars.

  • Sample Plans

Determine the Legal Structure of Your Business

Small Business Partnership Contract Template

Free Small Business Partnership Contract Template

Radhika Agarwal

  • December 13, 2023

13 Min Read

How to Choose the Best Legal Structure for Your Business

Consider the following situation: You have a brilliant business idea and have planned your business down to the last detail. You are most probably ready to get going. But, hold on. Did you choose a legal business structure? If not, you might want to decide the same before starting out.

Though picking an option amongst several similar-looking ones might seem intimidating at first, picking the right one can save your business from several legal hassles later on.

A proper legal structure decides whether you’ll stay on the good side of the law or not, both literally and figuratively.

Want to know how? Follow along to find out.

Why Does the Legal Structure of a Business Matter?

Against popular belief, a legal structure not just decides the taxes you’ll pay. It also decides the level of risks to your personal assets (your personal savings, car, house, etc.) and your business’s ability to raise funds through loans and investments .

Going through all of your options can help you decide which one fits the best for your business. Moreover, it also helps you finalize if you would need an attorney’s help or not.

So, if you want to get a quick overview of what different types of business structures would look like, read on.

What Are Different Types of Business Structures?

What are different types of business structures

Depending upon the type of ownership, liability on personal assets, and size of the firm, the following legal structures exist in the US:

Sole Proprietorship

Partnership, corporation.

Suppose you plan on selling artwork, retail products, or any product or service under the sun for that matter. Also, you want to go through as little paperwork and legal procedures as possible.

Then a sole proprietorship might be for you. Especially, if you plan on starting the business under your name, you might not have to do any paperwork at all.

Sole Proprietorships | Legal structure of your business

Even if you want to have a domain name, registering your domain name would be the only legal procedure you’ll have to go through. And that’s fairly simple and inexpensive.

Hence, a sole proprietorship is a perfect business structure type for those who have a product or service and wish to start selling it right out.

How to form a sole proprietorship?

A sole proprietorship is fairly simple to form. If you have your business idea and plan sorted, you can start your business. Without any official registration or legal framework whatsoever.

Although you should keep in mind that depending upon your industry you might need to get some licenses and permits before you start.

If you are doing business under a name other than your own, you would also have to get a DBA or “ doing business as.”

A sole proprietorship has the following advantages:

  • Easy to set up: A sole proprietorship is fairly easy to set up and involves little or no legal hassles.
  • Relatively Inexpensive: Setting up a sole proprietorship is the cheapest of all legal structures. All you have to pay is a small fee for a business license and business tax depending upon the location of your business .
  • Dissolution is easy: As your business has no stakeholders except you, the dissolution can happen without any disagreements or problems.
  • You are the sole benefactor of profits and sole bearer of losses: Your profits belong only to you and you aren’t answerable to anyone for your losses.

Disadvantages

Although sole proprietorship might look like a great option right now, it has its fair share of disadvantages too. Which are as follows:

Liability on your assets: As you and your business are a single legal entity, if things go south your personal assets would be in danger. i.e., you’ll have to pay the debts incurred through your business using your personal assets.

Difficulty in raising capital: It is tougher for sole proprietors to acquire a small business loan or funding. Banks are often less willing to give loans to sole proprietors as they are considered less credible. Also, you cannot sell stocks to generate funds as a sole proprietor.

Limited tax savings: Sole proprietorships do not get tax benefits like corporations do for offering benefits like medical reimbursements and insurances to their employees.

Suppose you are an architect and want to start a firm with your friend who’s an interior designer.

Depending upon the ratio of contributions you make towards the working of the firm you’ll have a certain share in profits and losses of the firm.

It can either be equal or 40 to 60, etc. Also, the size of contributions can be measured both by the size of your investments or the amount of work you provide.

Partnership | Legal structure of your business

For example, if your friend has invested a higher sum of money but you work more. So, chances are that your ratio in profits would be equivalent.

Apart from that, a partnership is a lot like a sole proprietorship but instead of being the sole owner of the business, you have a partner.

Your partner would have a predetermined share in the profits and losses of your firm.

How to form a partnership?

Just like a sole proprietorship a partnership is fairly simple to form. The only difference is a partnership agreement.

Having a partnership agreement is crucial to this business structure type. A lot of things can go haywire if you don’t work on pre-decided terms and conditions.

Your partnership agreement would decide your share in profits and losses, the type of partnership you have, and what would happen if you decide to dissolve the partnership in the future.

Types of partnership

A partnership can be of the following types:

  • General Partnership: In a general partnership, all the partners have an equivalent stake in the business.
  • Limited Partnership: A limited partnership has partners who play the role of an investor and have no say in the functioning of the business.
  • Joint Venture: A joint venture is a partnership that exists for a limited period or for certain projects.

The advantages of a partnership can be given as follows:

Easy to form: Just like a sole proprietorship, a partnership is fairly easy to form. And requires a very little amount of legal procedures.

Has more growth potential: As a partnership combines the strengths and talents of all partners, it has more growth potential than a sole proprietorship.

Moving forward without a partnership agreement can be disastrous: You shouldn’t move forward without a proper legal agreement . There are a lot of things that can go awry without one. And coming to terms with an agreement that suits everyone is difficult for a lot of partnerships.

Unlimited liability on your personal assets: Just like a sole proprietorship, there’s an unlimited liability on your personal assets. In such structures, you can lose your personal belongings if your business fails.

Difficulty in dissolution: Dissolution is tougher in partnerships as the business has multiple stakeholders.

Consider the following situation: You want to start a business but have a significant amount of personal belongings that you don’t want to risk.

Then an LLC or a limited liability company might be for you. In an LLC you are taxed only on your profits.

Also, there’s no liability on your personal assets as you and your business are separate legal entities.

LLC | Legal structure of your business

An LLC is a fairly new legal structure and is good for industries where lawsuits are common. Moreover, an LLC gets the best of both worlds.

Its tax structure is like a partnership and it has a limited liability structure like a corporation.

Also, unlike a corporation, an LLC can be set up by smaller businesses too.

How to form an LLC?

An LLC is formed by creating a separate legal entity for your business. Although it requires way more paperwork than a sole proprietorship or partnership, it is a more secure structure than either of those.

And you might think that a little paperwork is worth the benefits it provides. And it definitely is! You can form an LLC either on your own or with a partner.

The specific amount of paperwork required for an LLC varies from state to state.

Your personal assets would be safe: One of the major benefits of any limited liability structure is that your personal assets remain unaffected if things go downhill.

The tax structure is beneficial: You are only taxed on your profits in an LLC.

An LLC is tougher to set up: It is comparatively more expensive and complicated to set up. You might have to take some legal advice as well before you set up an LLC.

An LLC has to be dissolved within 30 years: An LLC has to be dissolved in 30 years or less, depending upon your pre-decided agreement. Although, all states have different laws regarding the dissolution of an LLC.

Corporations are one of the most commonly known types of business structures out there. They are usually larger, have more employees, and take the highest amount of legal work to set up.

The biggest advantages of a corporation are its limited liability structure and the tax benefits it gets.

Most of the bigger companies and MNCs follow this structure, but if you have a small business it is neither possible nor feasible to have such a structure. Though, a lot of LLCs and partnerships turn into corporations as they grow bigger.

How to set up a corporation?

Setting up a corporation requires the highest amount of paperwork and legal procedures.

You have to register your business name and get your EIN or employer identification number, etc.

Also, depending upon your state and type of corporation the legal procedure for setting up a corporation would differ.

Types of corporation

A corporation can be divided into the following types depending upon its size and functions:

A C Corp is the most common type of corporation out there. Most MNCs follow this structure.

C- Corp | Legal structure of your business

To form a C Corp you collect fundings and give stocks equivalent to the funding to your investors.Although double taxation might be a problem, C Corp has the highest opportunity of getting investments. Hence, most companies follow this structure when they go public. For example, if you are a corporate firm with a large number of employees and investors, you’ll follow this structure. Microsoft, Intel, and Apple are popular examples of C Corps.

An S Corp is a pass-through tax entity and is usually owned by families or small groups.

S Corp | Legal structure of your business

Also, the motive of a C Corp is to grow big and go public, while an S Corp exists to generate profits for its owners. Hence, both the structures fulfill different motives for their owners. An S Corp is very similar to an LLC and is a structure that can be followed by small businesses. A lot of S Corps turn into C Corps as they grow bigger. Apart from that, people choose this structure mainly for the tax benefits it offers.

How to determine the legal structure of your business

For example, organization XYZ works towards the social and economic upliftment of underprivileged children. But at the same time, it has investors to whom it has to send back profits. Hence, XYZ organization is not a non-profit but a B Corp. A B Corp is an excellent way of standing behind a social cause and many states provide tax benefits to such structures. Ben & Jerry’s, Seventh Generation, and Etsy are popular B Corps in the US. If we try to understand this further through the example of Ben and Jerry’s, the company has three main motives- product quality, economic reward, and service to the community. Because Ben and Jerry’s is a for-profit company that stands behind a cause it becomes eligible for its B Corp status.

The most limited possible liability: Corporations give the highest amount of protection to your personal assets. If things go awry, your personal assets will be the safest in this structure.

Corporations have a high potential to raise capital: With the option of selling stocks to get funding and more credibility to get loans, raising capital is fairly easy for corporations.

Taxes are filed separately from personal taxes: As taxes are filed separately from personal taxes in corporations your business becomes eligible for corporate tax breaks.

Difficult to set up: Corporations go through way more procedures, legal or otherwise and are fairly difficult to set up. The structure is also not an ideal one for smaller businesses.

Double taxation: You have to pay taxes on both the earnings of the corporation as well as on the dividend you get from it. This disadvantage mainly holds true for a C Corp.

If you want to work towards a social cause and channel all your energies towards it, a non-profit organization would fit the best for you.

The chief difference between any other legal structure and a non-profit is that a non-profit solely exists for fulfilling a social cause and not for earning profit.

Such organizations get tax-exempt status from the government.

Non Profit | Legal structure of your business

As a nonprofit is run for serving society and for personal values, it does not have any advantages or disadvantages as such.

But you should keep the following things in mind before starting a nonprofit organization :

  • Your setup will be similar to that of a corporation: You’ll have to register your business’s name as well as your taxation number as a non-profit to get tax exemptions.
  • You should have a solid system in place to collect funds: If you choose this business structure, generating funds to keep your firm going will be a chief priority.

In conclusion, the legal structure of a business plan greatly depends upon the said firm’s function and size. The number of legal formalities you are able and willing to fulfill, the laws of the state your business will function from, and so on.

Also, getting legal advice from an attorney while deciding your structure can be of great help for your business. A little expense and effort, in the beginning, can take your business a long way in the future.

Your legal structure would impact a lot of aspects of your business. Hence, you should choose it wisely.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

crossline

About the Author

what is a legal structure in a business plan

Radhika is an economics graduate and likes to read about every subject and idea she comes across. Apart from that she can discuss her favorite books to lengths( to the point you\'ll start feeling a little annoyed) and spends most of her free time on Google word coach.

Related Articles

what is a legal structure in a business plan

How to Write a Business Plan Complete Guide

what is a legal structure in a business plan

How to Write Competitive Analysis in a Business Plan (w/ Examples)

what is a legal structure in a business plan

Business Startup Checklist: 10 Steps for a Great Start

Upmetrics logo

Reach Your Goals with Accurate Planning

No Risk – Cancel at Any Time – 15 Day Money Back Guarantee

trustpilot reviews

Popular Templates

Small-Business-Partnership-Contract-Template

Legal Form of Organization in Business Plan

The legal form of organization in business plan is used to decide how the company will function, how roles will be assigned and how relationships will work. 3 min read updated on February 01, 2023

The legal form of organization in business plan is used to decide how the organization will function, how roles will be arranged and assigned, and how relationships will work. These organizational steps should take place at the beginning of the business formation.

Starting a Business

The first step when beginning a business is to name the business. The name must be unique and not in use by another existing entity. The next step is to decide on the organization type your business will use. Each business entity has specific requirements on how they are run including how income is reported. The business types include:

  • Sole proprietorship.
  • Partnership.
  • Limited Liability Company.
  • Limited Liability Partnership.
  • Corporation.
  • S Corporation.
  • Tax-exempt organization.

Each type has advantages and disadvantages that should be reviewed before making a final decision. However, the business type you choose isn't permanent. As the needs of your business change, the business entity type can be changed. Examples include:

  • Changing a sole proprietorship to a partnership due to growth.
  • Switching to a corporation to establish protection that comes with limited liability.

Limited Liability is attractive to business owners because it protects personal assets from any debts or obligations incurred by the corporation.

Business Type Requirements

A major component of selecting a business type is what is required to be legal and the tax implications.

  • Applications to the state government are not required.
  • Dependent on the state, registering the business may be required with the state and/or country.
  • A business license may be required based on the type of business and state requirements.
  • The IRS views all business activity as personal. When filing, personal and business income are seen as the same thing.
  • A sole proprietorship is personally responsible for all aspects of the business. If the business is sold, it can impact any personal assets if you are found liable.
  • In a general partnership, two or more sole proprietors are seen by the IRS as having equal responsibility.
  • Any profit and loss distribution is determined by the partnership agreement and is then passed to the individual partners.
  • Profit and loss distribution does not have to match the percentage of ownership.
  • The partnership is not subject to income or franchise tax.
  • The structure and tax implications are similar to a general partnership, but a limited partnership ( silent partner ) allows for ownership without the requirement of being actively involved in how the business is managed.
  • Business liabilities are limited to the amount invested by the partner.
  • Outside investors can be partners without taking on any liabilities.
  • Personal liability protection is provided without having to meet the administrative and governance procedures.
  • The Articles of Organization determine the ownership percentages, distribution of profit and losses, and voting rights. In corporations, this is determined by stock ownership.
  • Most LLCs use the pass-through method of taxation. This means that taxes aren't paid by the LLC, but by at the personal tax level of the owners. The personal rate is lower than the corporate tax rate. When the LLC files taxes, no money is sent and an owners report is included to show the owners will pay the tax instead.
  • Based on the state, the LLC is subject to a franchise tax .
  • A corporation can be formed as for-profit or nonprofit.
  • Corporations provide a shield from liabilities. This protection is only removed if the owners or board members have been found to be illegally running a corporation and have been breaking federal and/or state laws.
  • Corporations can sell stock in the business.
  • A Board of Directors is used to manage corporate policies and strategies. This is for both for-profit and nonprofit.
  • Corporations continue to exist even in the event of the owner's death, or if owners leave.

If you need help with the legal form of organization in the business plan, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

Hire the top business lawyers and save up to 60% on legal fees

Content Approved by UpCounsel

  • Types of Business Structures
  • Best Type of Corporation for Small Business
  • Partnership Business Entity: Everything You Need To Know
  • Types of Companies LLC
  • LLC Partnership
  • Individual Ownership of Business
  • Partnership Advantages and Disadvantages
  • What Is Classification of Business According to Ownership?
  • Types of Business Entities
  • Benefits of a Close Corporation as Opposed to a Partnership

Legal Structure of a Business

The different business structures impact taxes, financing, and personal liability. See which legal structure suits your needs.

what is a legal structure in a business plan

One of the first decisions a new business owner makes is what type of legal structure the business will have. There are several different ways to set up your company, and each will have implications as far as taxes, financing, and your personal liability.

Let’s take a look at the options, and the benefits and drawbacks of each. Of course, your individual circumstances will dictate which structure makes the most sense for you, so be sure to get professional legal advice before making a decision.

Sole Proprietorship

A sole proprietorship is a business owned by a single individual. This is the easiest type of structure to set up. That doesn’t mean there are no regulations to follow, however. The procedure will vary from state to state, but the steps to acting as a sole proprietorship are very simple.

BUSINESS NAME CHOICE

Business name registration, licenses and permits, employee identification number (ein).

It’s important for tax purposes to keep your business and personal finances separate, so set up a business bank account and get a business credit card. A sole proprietorship doesn’t offer you any personal protection from legal claims against the business, so it’s a good idea to get liability insurance, as well. You will also be personally responsible for the business’s financial obligations, so consider a business liability insurance policy too.

Depending on what type of business you’re in, you may have to report sales or other taxes. Income taxes will be filed as personal income on your individual return with a Schedule C attached. You pay all the taxes an employer would otherwise pay for you, such as contributions to Social Security and Medicare, and you may have to pay estimated taxes throughout the year. Speak with an accountant and make sure you understand and follow through on the requirements.

Partnership

A partnership is when two or more people combine to share in the profits or losses of a business. Similar to a sole proprietorship, money made or lost is reported personally by the partners on their individual income tax returns. Generally, the steps to forming a partnership are similar to those for sole proprietorships, and again, may vary slightly from state to state.

There are a few different types of partnerships, but the two most common are general and limited.

General Partnerships

In a general partnership legal structure, ownership and management responsibility are usually shared equally between the people involved. If a different distribution is being used, you would spell that out in your partnership agreement.

Limited Partnerships

Limited partnerships are usually formed when one person is doing most of the actual work and another (or others) have invested money. The general partner will typically run the business, and the other partners will have limits on their involvement. Again, these would be outlined in your agreement. You are not legally required to have a written partnership agreement , but it is smart business practice to do so.

Managing A Partnership Legal Structure

Another thing to keep in mind about partnerships is that if a partner wants to leave, the other(s) will have to buy him or her out, or dissolve the business. This is another reason it’s smart to have a written agreement, one that includes a buy-sell or buyout agreement.

In a partnership, the partners are still personally liable for all obligations of the business. That means if the business defaults, a creditor can come after your house, car or anything else you own. (Limited partners may have limited liability.)

Another aspect of a partnership is that any of the individual partners can legally commit the business to a contract, even one that the other partners may not agree with or even be aware of. Between being responsible for the business’s debt and the ability of each partner to bind the partnership to contracts, it’s vitally important to trust anyone you’re considering entering into a partnership with, and to also be sure that your personalities will complement each other and you’ll be able to work together.

As with sole proprietorships, the income or loss of a partnership passes through to the owners, and is accounted for on their individual tax returns.

Corporation

A corporation, or C corporation, is an independent entity for both legal and tax purposes, separate from the people who own it or run it. A corporation can raise money by selling stock, and a corporation will continue indefinitely, even if one of the shareholders dies or sells his or her shares. Owners of a corporation are not personally responsible for the financial obligations of the corporation, nor are they personally liable in case of lawsuits.

The corporation legal structure can be complicated to set up and manage, but it’s an independent entity that may benefit business owners in the long run.

Because of this separate status, the corporation itself pays taxes; the income is not passed through to the owners’ individual tax returns. Owners would pay taxes just as any other employee of a business would: on the money they get for salaries, bonuses and other benefits. One thing to be aware of is the potential for double taxation. As an owner, you would pay taxes on whatever salary you draw from the company, but you would also pay corporate taxes on the profits of the business.

It’s a far more complicated, expensive, and lengthier process to set up a corporation. The rules for forming corporations are set by each state, and each has a list of regulations, as well. You need to prepare articles of incorporation and a set of bylaws describing how the corporation will be run. You’ll most likely need an attorney to help you with the paperwork and certifications involved.

Once you’re up and running, you’ll probably need an accountant to handle the more complicated tax calculations and filings. You’ll need to register with the IRS and state and local tax agencies, get an EIN, and pay taxes on your corporate profit. You’ll also need to pay a portion of your employees’ Social Security and Medicare taxes.

S Corporation

If your business qualifies according to the IRS rules , you might choose to become a special class of corporation known as an S corp. To be classified as an S corporation, you still have to become a corporation, following the general procedure outlined above.

Like a C corporation, an S corp is also a separate entity from its owners, so your financial liability would still be limited, but its profits or losses would pass through to your individual tax return. The business itself is not taxed, so you’re not open to the potential of being taxed twice.

S corporations can only issue common stock, which experts say can make it harder to raise capital. S corps can also only be owned by individuals, estates, and some kinds of trusts, so you limit the type of investors you can attract.

Limited Liability Company (LLC)

In many ways, this type of structure offers the benefits of both a corporation and a partnership. The owners are protected from having personal liability, as they would in a corporation, but an LLC follows the more streamlined structure of a partnership. To set up an LLC, you have to file with your state, and some states will also require an operating agreement, which is similar to a partnership agreement. LLCs cannot sell stock, although you can give a percentage of ownership to outside investors.

The LLC legal structure offers the benefits of both a corporation and a partnership for many business owners.

In an LLC, the owners are known as “members.” Members can be people, partnerships, corporations, or even other LLCs. The profits and losses are passed through LLCs to their members, who report them on their individual returns, just as in a partnership.

As with partnerships and sole proprietorships, LLC members are considered self-employed, and have to make their own tax contributions toward Medicare and Social Security. An LLC can also request S corporation status, which may offer other tax benefits. An attorney or accountant could advise you about that.

Why might you opt for an LLC instead of an S corporation? Filing as an LLC means less paperwork and fewer costs to get started. There are also fewer restrictions on how the profits in an LLC are shared among its members. On the downside, similar to partnerships, if a member leaves, in many states the business is dissolved, although you can put provisions about that in your operating agreement.

Legal Structures Are Not Set in Stone

One very important thing to keep in mind is that you can change the organizational structure of your business if your situation changes. It’s possible to start off as a sole proprietorship and convert to an LLC or corporation. As your needs grow and change, the structure of your business can change with them. As always, it’s best to consult with your attorney and accountant about what would be most suitable for you.

Apply for a Loan

Get started.

Loans from $5,000 - $100,000 with transparent terms and no prepayment penalty. Tell us a little about yourself, your business and receive your quote in minutes without impacting your credit score.

Thanks for applying!

Loans are originated and funded through our lending arm, Accion Opportunity Fund Community Development. By clicking “Continue to Application,” you consent to, Accion Opportunity Fund Community Development’s Terms of Use and Privacy Policy ; and to receive emails, calls and texts , potentially for marketing purposes, including autodialed or pre-recorded calls. You may opt out of receiving certain communications as provided in our Privacy Policy .

what is a legal structure in a business plan

ProfitableVenture

Writing a Business Plan – How to Plan Your Legal Structure

By: Author Tony Martins Ajaero

Home » Business Plans

Are you in the process of starting a business? How do you plan your business legal structure? What is the legal structure of a business plan? Well, I advice you read on to learn how to legally plan your business structure.

In case you are wondering where your business belongs, here are some common definitions:

  • Sole proprietorship: A business that is owned and run by a single individual
  • Partnership: A business created and sustained by the joint efforts of two or more individuals
  • Corporation: A business that enables prospective shareholders to exchange money or property for capital stock

A business legal structure is a very important component of a business plan. When beginning a business you must decide what legal structure your business will assume. The most common business structures are sole proprietorship, partnership, C Corporation, and S Corporation.

Your chosen structure determines which income tax return form to have to file. Making a final decision as to which legal structure your business would assume could be very tricky because each option has its own pros and cons. Now, let’s discuss each of these types of business structures.

Writing a Business Plan – How to Plan Your Legal Structure

1.  sole proprietorship.

A sole proprietorship refers to a business that is owned by one individual. Most businesses, especially small businesses are sole proprietorships by default unless they are stated to be otherwise. The owner of a sole proprietorship is expected to report all business profits and losses on their personal tax returns. This is because a sole proprietorship is not taxed separately.

Keep in mind, however, that by being a sole proprietor, you have unlimited liability to the business as well as its debts. This implies that if you happen to be sued ( or you have problems with paying up your debts ), your personal assets ( your house, cars ) will be at risk; alongside your business assets.

So, while a sole proprietorship has the advantage of not being taxed separately, it has the disadvantage of making you lose more than you can ever imagine should you run into debt or legal hassles.

2.  LLC ( Limited Liability Company )

This business structure was not widely known until recently. And now, it has become the most popular way for small businesses to get started. Although an LLC is taxed just like a sole proprietorship, it has the added advantage of a limited protection of a corporation.  Because the LLC is a fairly new addition to the business legal structures, you need to find out if your state or country’s business laws recognize LLCs.

As an LLC owner, you can use losses to offset income but only up to the amount you invested and not more. And in case you run into problems, your personal assets have more protection than in the case of a sole proprietorship. ( But this protection is not 100% ). However, one disadvantage of LLCs is that they are usually subject to additional state or franchise taxes.

3.  C Corp

A C Corporation is a taxable entity; it is taxed solely on its income rather than the owner being taxed. This offers a big advantage to the owner in that a C Corp can use an “ income splitting ” strategy to divide the profit realized from the business between the company and its owners.

This means part of the tax obligations are due on the corporation itself and the remaining part id taxable to the owners. This strategy could put both the company and the owner into lower tax brackets for tax savings.

But C Corps can be subject to double taxation on dividends paid out to shareholders, and this is the main disadvantage of this legal structure. When this happens, the corporation is taxed on the its income while the shareholders are also taxed on their dividends.

4.  S Corp

An S Corp doesn’t have to pay self-employment taxes on its income. So, this legal structure can provide some tax savings. But S Corporations are required to pay owner-employees a “ reasonable salary ” before they can pay out any dividends to shareholders.

However, the reasonable salary paid is subject Social Security and Medicare fees, both of which would sum to self-employment tax most of the time. S Corps can only enjoy significant tax savings when the company becomes a big income earner. Like C Corps, S Corps are intricate and cost more attorney and accountant fees at the time of tax.

To find the best legal structure for your business, search the web for more resources that give an in-depth explanation of the pros and cons of each option. Then assess your business to understand which option seems to be most suitable for it.

If you are having problems with choosing the most suitable legal structure for your business, you can consult a seasoned business lawyer or CPA (Certified Public Accountant) to help you decide which is right for you. While an attorney would help you protect your personal assets by helping you choose the right structure, an accountant would determine tax-reporting responsibilities for your chosen legal structure.

In conclusion , after deciding on the right legal structure for your business, you should educate yourself regarding your rights and responsibilities as a business owner. To know more about these, you can consult your local SBA ( Small Business Association ) or ( IRS ) Internal Revenue Service.

  • <a title="Business Plan Industry Analysis" Go to Chapter 9: Y our Industry Analysis
  • <a title="How to Write a Job Description" Go Back to Chapter Eight Part D: Writing your Business Plan Job Description
  • <a title="How to Write a Business Plan Executive Summary" Go Back to Chapter 7 : How to Write a Business Plan Executive Summary
  • <a title="The Beginner’s Guide to Writing a Good Business Plan" Go Back to Introduction and Table of Content

Related Posts:

  • 7 Beginner Steps to Writing a Simple Business Plan for Funding
  • How to Present a Business Plan to Investors, a Bank or Boss
  • 7 Steps to Writing a Winning Digital Marketing Plan & Strategy
  • How Many Pages Should a Business Plan Be? 10, 25, 50 or 100?
  • 20 Best Books on How to Write a Business Plan
  • How to Describe your Product in a Business Plan
  • Can You Put Pictures in Business Plan?

How to write the structure and ownership section of your business plan?

structure and ownership in a business: different types of liabilities that a business may incur

Business planning is vital to the success of any entrepreneur because it helps them secure funding and find competent business partners. The document itself contains a variety of key sections, including the presentation of the legal structure and ownership of the business.

This section details the legal structure of your business and helps interested parties such as lenders and investors understand who they will be doing business with if they decide to go ahead and finance your company.

In this guide, we’ll look at the objective of the structure and ownership section, deepdive into the information you should include, and cover the ideal length. We’ll also assess the tools that can help you write your business plan.

Ready? Let’s get started!

In this guide:

What is the objective of the structure and ownership section of your business plan?

What information should i include when presenting the legal structure and ownership of my company in my business plan.

  • How long should the structure and ownership section of your business plan be?
  • Example of structure and ownership in a business plan

What tools should I use to write my business plan?

The objective of this section is to provide potential investors, lenders, and strategic partners with a clear and transparent view of your business's legal form, ownership distribution, and registration details. 

It aims to build credibility and trust by showcasing your commitment to openness and compliance with regulations. Let's take a look at some of the key objectives:

Communicate the legal form and registration details

  • You should explicitly state your business's legal form. For example, your business might be corporation, sole proprietorship, or limited liability company (LLC). 
  • Clearly explaining your chosen legal form helps stakeholders understand your entity's liability, taxation, and management implications.
  • It is also essential to disclose where your company is registered. This information is vital as it provides clarity on the jurisdiction under which your business operates. 
  • It also helps investors and lenders assess any legal and regulatory implications specific to the location of registration.

Identify shareholders

  • Potential investors and lenders need to know who owns the company and the percentage of ownership each party holds. 
  • By providing this information, you instill confidence in your business and help identify what needs to be verified as part of Know Your Customer (KYC) and Anti-Money Laundering (ALM) checks down the line.

Transparency is the cornerstone of credibility for businesses. By openly presenting the legal structure and ownership, you signal to potential investors that your business operates with integrity and adherence to regulations. 

Notably, anti-money laundering regulations require investors to verify the identity of all shareholders before committing funds. By providing a clear picture of the parties involved, you can facilitate this process and build trust with investors.

Venture capitalists (VC) firms and angel investors in particular, may have specific criteria such as location and ownership mandates governing the companies they can finance. Being transparent about your company's structure and ownership enables potential investors to assess whether your business aligns with their investment preferences and requirements.

Need a convincing business plan?

The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.

The Business Plan Shop's Business Plan Software

The structure and ownership subsection arrives quite early in your business plan as it is the first part of the company section which is the second section of the document (after the executive summary) if you are following a standard business plan outline .

At this stage, the reader is still in the process of getting familiar with your business, and this section serves as a crucial foundation for potential investors and partners and helps them understand the core aspects of your business’s structure.

Here's what you should include:

Company registration details and registered office address

Provide information about when and where your company was registered and its registration number. This enables readers to understand the jurisdiction under which your business is operating and helps verify its legal existence.

Also, mention the registration date to showcase the company's longevity or recent establishment.

Include the registered office address of your company. This is the official address where the company can be contacted, and legal notices can be served. Providing this address demonstrates your commitment to compliance and transparency.

The information above needs to repeated for each subsidiary or joint venture owned by your business in order to provide a clear map of the coporate structure.

Overview of ownership

Offer a concise overview of the ownership structure of the company. Identify the shareholders, and specify their ownership percentages or shares. 

If there are numerous shareholders, list individuals or entities owning 5% or more, and highlight those with a controlling interest in the company or on the board.

If the business is controlled by another business, such as a holding company for example, it is also useful to explain who controls that business as well.

Roles and responsibilities of shareholders

In case of multiple shareholders, explain their respective roles and responsibilities within the organization. 

Differentiate between passive investors, board members, and executive or non-executive directors. 

Shareholders' agreement (if applicable)

If the business plan is presented for investment purposes, it is useful to clarify if a shareholders' agreement is in place between the existing investors. 

This agreement outlines the rights and obligations of shareholders and adds an extra layer of legal protection for investors and shareholders.

Expertise of co-shareholders

Highlight any shareholders who contribute more than just financial capital to the company. 

If, for instance, a shareholder is an industry expert and brings valuable advice, contacts, and credibility, emphasize this aspect. 

Doing so demonstrates the added value these shareholders bring to the business.

Group or franchise structure

If your company operates as part of a group or franchise, provide this information for each individual company receiving funds. 

Clarify the relationship between the main company and the individual entities within the group and their respective legal structures.

Addressing geographical restrictions

If some investors have geographical restrictions on their investments, clearly indicate whether your company meets their eligibility criteria. 

This helps investors quickly assess whether your business aligns with their investment mandates or not.

shareholders at a general meeting discussing about their business and future planning

How long should the structure and ownership section of your business plan be? 

The length of your business plan's structure and ownership section requires a delicate balance. 

While a general rule of thumb suggests that it should be about 2 to 3 paragraphs, the actual length depends on several factors, including the complexity of your corporate structure and the number of shareholders involved.

The complexity of your corporate structure 

  • A concise presentation may be sufficient if your company's legal structure is relatively straightforward, with a single owner or a small number of co-founders. 
  • In such cases, aim to provide the necessary information without overwhelming the reader with unnecessary details. A paragraph or two may convey the key points effectively, ensuring clarity and brevity. 
  • However, if you have a complex business structure, aim to provide details about members who play a key role in business continuity and profitability. 

The number of shareholders involved

  • If your business involves multiple shareholders, each with significant ownership percentages or unique roles, you may need to dedicate more space to this section. 
  • Do this by providing a comprehensive breakdown of ownership distribution and outlining each shareholder's contributions. 
  • This may take up more space as you need to add additional information. However, if you have a pretty straightforward ownership structure, a paragraph or two will be sufficient enough.

Regardless of the complexity, striking the right balance between providing sufficient detail and avoiding excessive technical jargon is crucial. The structure and ownership section should be reader-friendly, allowing potential investors and stakeholders to understand the core aspects of your company without feeling overwhelmed by intricate legalities.

Repetition can dilute the impact of your message and unnecessarily lengthen the section. Ensure that you don't reiterate information that has already been covered in other parts of the business plan. Instead, focus on providing unique insights and details that enhance the reader's understanding of your corporate structure and ownership.

When crafting this section, prioritize the most critical points that investors or partners need to know about your company's structure and ownership. 

Focus on aspects that directly impact decision-making, such as the majority shareholder's influence, board composition, different classes of shares in issue, or any unique arrangements that set your business apart.

Need inspiration for your business plan?

The Business Plan Shop has dozens of business plan templates that you can use to get a clear idea of what a complete business plan looks like.

The Business Plan Shop's Business Plan Templates

Example of structure and ownership section in a business plan 

Below is an example of what the structure and ownership section of your business plan might look like. As you can see, it is part of the overall company section and precedes the location and management team subsections.

The structure and ownership section of a business plan provides a detailed overview of how your company is organized and who holds ownership stakes in the business.

structure and ownership section: The Business Plan Shop's online software

This example was taken from one of  our business plan templates .

In this section, we will review three solutions for creating a business plan for your business: using Word and Excel, hiring a consultant to write the business plan, and utilizing an online business plan software.

Create your business plan using Word and Excel

This is the old-fashioned way of creating a business plan (1990s style) and using Word and Excel has both pros and cons.

On the one hand, using either of these two programs is cheap and they are widely available. 

However, creating an error-free financial forecast with Excel is only possible if you have expertise in accounting and financial modeling.

Because of that investors and lenders might not trust the accuracy of your forecast unless you have a degree in finance or accounting.

Also, writing a business plan using Word means starting from scratch and formatting the document yourself once written - a process that can be quite tedious - especially when the numbers change and you need to manually update all the tables and text.

Ultimately, it's up to the business owner to decide which program is right for them and whether they have the expertise or resources needed to make Excel work. 

Hire a consultant to write your business plan

Outsourcing your business plan to a consultant can be a viable option, but it also presents certain drawbacks. 

On the plus side, consultants are experienced in writing business plans and adept at creating financial forecasts without errors. Furthermore, hiring a consultant can save you time and allow you to focus on the day-to-day operations of your business.

However, hiring consultants is expensive: budget at least ÂŁ1.5k ($2.0k) for a complete business plan, more if you need to make changes after the initial version (which happens frequently after the first meetings with lenders).

For these reasons, outsourcing the plan to a consultant or accountant should be considered carefully, weighing both the advantages and disadvantages of hiring outside help.

Ultimately, it may be the right decision for some businesses, while others may find it beneficial to write their own business plan using an online software.

Use an online business plan software for your business plan

Another alternative is to use online business plan software .

There are several advantages to using specialized software:

  • You are guided through the writing process by detailed instructions and examples for each part of the plan
  • You can be inspired by already written business plan templates
  • You can easily make your financial forecast by letting the software take care of the financial calculations for you without errors
  • You get a professional document, formatted and ready to be sent to your bank
  • The software will enable you to easily track your actual financial performance against your forecast and update your forecast as time goes by

If you're interested in using this type of solution, you can try our software for free by signing up here .

To sum it up, a well-written structure and ownership subsection is key to ensuring that the reader is clear on who controls the business, and whether or not it fits their investment criterias.

Also on The Business Plan Shop

  • How to do a market analysis for a business plan
  • How to present your management team in your business plan?
  • Where to write the conclusion of your business plan?

Know someone who needs help writing-up their business plan? Share this article with them and help them out!

Guillaume Le Brouster

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.

Create a convincing business plan

Assess the profitability of your business idea and create a persuasive business plan to pitch to investors

The Business Plan Shop | Business Plan Software

500,000+ entrepreneurs have already tried our solution - why not join them?

Not ready to try our on-line tool ? Learn more about our solution here

Need some inspiration for your business plan?

Subscribe to The Business Plan Shop and gain access to our business plan template library.

business plan template library

Need a professional business plan? Discover our solution

Write your business plan with ease!

Business Plan Software

It's easy to create a professional business plan with The Business Plan Shop

Want to find out more before you try? Learn more about our solution here

Logo

  • Contract Management

Supplier Management

Savings Management

  • Data & Security

FAQ’s

oboloo Articles

Understanding the legal structure of a company: how it affects procurement processes.

When it comes to running a successful business, there are many factors to consider. From marketing strategies to financial planning , every decision can have a significant impact on the company’s overall success. But one aspect that often gets overlooked is the legal structure of a company and how it affects procurement processes.

Understanding the legal structure of your company is crucial because it sets the foundation for how you operate, make decisions, and engage in procurement activities . Whether you’re a sole proprietorship or a multinational corporation, your legal structure plays a vital role in shaping your procurement practices.

In this blog post, we will delve into the world of legal structures and explore how they influence procurement processes . We’ll take an in-depth look at different types of legal structures for companies and discuss their benefits and drawbacks. So buckle up and get ready to navigate through this exciting journey of understanding the intersection between law and business !

What is the legal structure of a company?

The legal structure of a company refers to its formal organization and classification under the law. It defines how the business is owned, operated, and regulated. This structure determines important aspects such as liability, taxation, decision-making authority, and ownership rights.

One common type of legal structure is a sole proprietorship . In this setup, an individual owns and operates the business on their own. They have complete control over decision-making but also bear all financial responsibilities and liabilities.

Another popular option is a partnership, where two or more individuals come together to share ownership and management of the business. Partnerships can be general partnerships or limited partnerships depending on the level of liability each partner assumes.

For larger businesses with multiple owners or shareholders, forming a corporation may be preferable. A corporation is considered a separate legal entity from its owners (shareholders), offering limited liability protection for its members.

A relatively newer form of legal structure gaining popularity is the Limited Liability Company (LLC). Combining elements of both corporations and partnerships, LLCs provide flexibility in terms of management while shielding members from personal liability.

Each legal structure has its advantages and disadvantages when it comes to procurement processes . Understanding these nuances will help companies make informed decisions about which structure best suits their needs in terms of risk tolerance , tax obligations, operational flexibility, and growth potential.

By comprehending the intricacies of different legal structures available for companies today—sole proprietorships, partnerships (general or limited), corporations (including S-Corps), LLCs—business owners can navigate through procurement procedures effectively while complying with relevant laws.

It’s essential for entrepreneurs to consult with professionals such as lawyers or accountants before deciding on a specific legal structure for their company since every situation is unique and requires careful consideration based on individual circumstances.

How does the legal structure of a company affect procurement processes?

The legal structure of a company plays a significant role in shaping its procurement processes. Whether it’s a sole proprietorship, partnership, limited liability company (LLC), or corporation, each type of legal structure has its own set of rules and regulations that impact how procurement is conducted.

For instance, in a sole proprietorship where the owner is personally liable for all business debts and obligations, the procurement process may be simpler as there are no other stakeholders to consider . However, this also means that the owner bears all financial risks associated with procurement decisions .

On the other hand, partnerships involve two or more individuals sharing ownership and responsibility. In such cases, procurement decisions often require consensus among partners which can lead to longer decision-making processes .

LLCs offer limited liability protection to owners while maintaining flexibility in management structures. This allows for easier access to capital and potential expansion opportunities when engaging in procurements . However, certain restrictions on LLCs may apply depending on state laws.

Corporations have their advantages too – they provide separate legal entities from their owners and shareholders enjoy limited liability protection. Procurement within corporations can be complex due to multiple layers of decision-making involving board members and executives.

Understanding these different legal structures is essential for both buyers and suppliers involved in procurement processes as it helps determine what criteria need to be met when entering into contracts or agreements. It ensures compliance with relevant laws while protecting the interests of all parties involved .

The different types of legal structures for companies

When it comes to the legal structure of a company, there are several options to choose from. Each type of legal structure has its own set of benefits and drawbacks, and understanding these differences is crucial for effective procurement processes .

One common type of legal structure is a sole proprietorship. This is the simplest form of business organization , where one person owns and operates the company. It offers complete control over decision-making and profits but also leaves the owner personally liable for any debts or legal issues.

Another option is a partnership, which involves two or more individuals pooling their resources and skills to run a business together. Partnerships can be general partnerships, where all partners share equal responsibility and liability , or limited partnerships, where some partners have limited liability.

Corporations are another popular choice for businesses. They are separate legal entities that offer limited liability protection to shareholders. Corporations have complex governance structures and must comply with various regulations but offer advantages like access to capital through stock offerings.

Limited Liability Companies (LLCs) combine elements of both corporations and partnerships. They provide limited liability protection while allowing flexibility in management structures and taxation options .

Cooperatives are unique because they are owned by their members who use their services or products . These organizations operate on democratic principles, with decisions made collectively by members rather than traditional hierarchical management structures.

Each type of legal structure has its own implications for procurement processes in terms of financial responsibilities, decision-making authority, tax obligations, reporting requirements, access to funding sources, contractual agreements,and personal liabilities.

Understanding these different types will help companies determine which legal structure aligns best with their goals,strategy,and values when embarking on procurement processes

The benefits and drawbacks of each type of legal structure

When it comes to the legal structure of a company, there are several options available, each with its own benefits and drawbacks. Understanding these can help businesses make informed decisions that align with their procurement processes .

One common legal structure is sole proprietorship. This type of business is owned and operated by one individual. The main benefit of this structure is simplicity – it requires minimal paperwork and allows for complete control over decision-making. However, a major drawback is unlimited personal liability, meaning the owner’s personal assets may be at risk in case of debts or lawsuits.

Another option is partnership, where two or more individuals share ownership and responsibilities. Partnerships offer shared resources and expertise, making them ideal for small businesses looking to pool resources . However, partners also have joint liability for debts and may face disagreements on important decisions.

Limited liability companies (LLCs) provide owners with limited personal liability while maintaining flexibility in management structures. They combine aspects of both corporations and partnerships but have fewer regulatory requirements than corporations. On the downside, forming an LLC can be complex and costly compared to other structures.

Corporations are separate legal entities from their owners that offer limited liability protection to shareholders. They allow for easy transferability of ownership through buying/selling shares but come with stricter regulations such as regular reporting requirements and higher taxes.

Each type of legal structure has its advantages and disadvantages when it comes to procurement processes within a company’s operations . It’s crucial for businesses to carefully consider their goals, financial situation, potential risks , as well as consult professionals like lawyers or accountants before choosing the most suitable legal structure for their specific needs.

Understanding the legal structure of a company is crucial for effective procurement processes. The legal structure determines how a company operates and interacts with suppliers, clients, and other stakeholders. It influences the decision-making process, liability, taxation, and overall business operations .

Different types of legal structures exist for companies, each with its own benefits and drawbacks. Sole proprietorships provide simplicity but come with unlimited personal liability. Partnerships allow shared responsibilities but can lead to disagreements among partners. Limited liability companies (LLCs) offer flexibility and limited personal liability while maintaining ease of operation.

For larger organizations or those seeking external funding options, forming a corporation might be the best option. Corporations provide strong legal protection to shareholders but require more formalities in terms of governance and reporting .

When it comes to procurement processes, the legal structure affects various aspects such as contracting procedures, risk management strategies , negotiation power with suppliers, compliance requirements, and access to financing options.

Procurement professionals need to consider these factors when developing their strategies:

1. Legal Obligations: Different legal structures have different obligations regarding transparency in procurement practices. Understanding these obligations helps ensure compliance with laws related to fair competition and ethical sourcing .

2. Risk Management: The legal structure impacts how risks are allocated between the company and its suppliers or contractors. Procurement professionals must assess risks associated with contracts carefully based on their organization’s specific legal framework.

3. Contracting Procedures: The type of legal structure can determine whether an organization follows certain mandatory procedures when entering into contracts or engaging vendors/consultants.

Negotiation Power: Depending on their size and resources available due to their chosen form of incorporation(s), some organizations may have more bargaining power during negotiations than others—this could impact pricing arrangements or service level agreements reached during contract discussions.

Financial Considerations: Financial stability is crucial for successful procurement processes; therefore understanding how different legal structures affect tax liabilities or opportunities for financing is essential .

The legal structure of a company has a

Want to find out more about procurement?

Access more blogs, articles and FAQ's relating to procurement

Oboloo transparent

The smarter way to have full visibility & control of your suppliers

Contract Management 

Partnerships 

Charities/Non-Profits

Service Status

Release Notes

Feel free to contact us here. Our support team will get back to you as soon as possible

Sustainability

ClickCease

Legal Structure of a Business

Last updated on 21st April 2023

what is a legal structure in a business plan

In this article

According to Government statistics there are 5.9 million private sector businesses in the UK; of these:

  • 5.82 million businesses are small businesses (0 to 49 employees).
  • 35,600 businesses are medium-sized (50 to 249 employees).
  • 7,700 businesses are large (250 or more employees).

Small and medium-sized enterprises (SMEs) account for three fifths of the employment and around half of turnover in the UK private sector. 76% of private sector businesses did not employ anyone aside from the business owner(s).

These ‘no employees’ businesses comprise sole proprietorships and partnerships with only a self-employed owner-manager(s), and companies with one employee, assumed to be an employee-director.

Figures from the Department for Business, Energy and Industrial Strategy state that 16% of all SMEs operate in the construction industry; professional, scientific and technical activities account for 15% of all SMEs; whilst 10% are in the wholesale, retail trade and repair sector.

Private sector businesses are not evenly distributed across the UK. Based on head office location, rather than location of specific branches/sites, London and South East England have considerably more businesses than any other UK country or region of England.

A small business having a team meeting

What is the legal structure of a business?

Identifying the right legal UK business structure is a crucial part of a business start-up. When you start a business, the structure you choose will have significant implications on the amount of tax you pay, the degree of your personal liability should the business fail, the amount of administrative work involved and even your ability to raise finance.

As your business structure clearly defines your legal responsibilities, it is essential to put the time into researching which structure is the best fit for you.

The legal business structure is something you need to decide at the outset, although you can change it later on if required. All business structures have advantages and disadvantages, depending on factors such as the size of your business, the nature of your business and your future plans for the business.

What are the main types of legal business structures?

There are three main legal forms of businesses in the private sector:

  • Sole proprietorships or sole traders.
  • Partnerships.

Sole proprietorships are the most common legal form of a business. At the start of 2019 the UK private sector business population comprised 3.5 million sole proprietorships (59% of the total), 2.0 million actively trading companies (34%) and 405,000 ordinary partnerships (7%).

The Office for National Statistics ( ONS ) figures state that just over three quarters of UK private sector businesses are non-employers, and the majority of these are not registered for either Value Added Tax (VAT) or Pay as you Earn (PAYE) taxes.

Partnerships are probably the simplest way that two or more people can get together to run a business. This way of running a business is very old, and the law governing it dates back to the Partnership Act 1890 , which defines a partnership as “the relation which subsists between persons carrying on a business in common with a view to profit”.

This Act was followed by the lower profile but still used and relevant Limited Partnerships Act of 1907, but it was then almost a century before the next major piece of partnerships legislation arrived in the Limited Liability Partnerships Act of 2000.

HM Customs and Revenue ( HMRC ) records suggest partnerships account for around ÂŁ150 billion of turnover a year and that around 7% of UK businesses are partnerships.

The majority of UK partnerships are small businesses, with 55% having business turnover under ÂŁ75,000. However, there is a significant group of slightly larger business partnerships, 41%, that have turnover of between ÂŁ75,000 and ÂŁ1 million, and a very small number of major professional service firms operate as partnerships.

There are two types of company business structure that have limited liability:

  • Private limited companies (Ltd).
  • Public limited companies (PLC).

These businesses exist separately from their owners, who are known as shareholders. Employees are employed by the Ltd or PLC, and assets such as buildings or machinery, are owned by the Ltd or PLC.

This separate legal existence is known as incorporation. Any legal action is taken against the business and not the shareholders. Shareholders are only liable to lose the amount of money they have invested in the business therefore their liability is limited.

In addition to these main business structures there are a growing number of business organisations that are not in business for the money; instead their focus is on social or ethical objectives.

These include charities, co-operatives and social enterprises, which between them provide a wide range of goods and services and reinvest their profits into creating positive social change.

Why does the legal structure matter?

Getting your business structure right is important. One business structure is not necessarily better than another, but each has its own advantages and disadvantages.

Choosing the correct structure is an important decision as it will affect the way that your business is organised, your and your business’s legal obligations and tax position, filing requirements and your personal liability to third parties.

When thinking about which business structure will work for you, it may be helpful to consider the following:

  • Who owns the business?
  • Who do you want to manage the business?
  • What is the tax position of each structure?
  • How risk averse are you?
  • Is personal liability a potential issue?
  • What are the costs involved in setting up and running the structure?
  • What formalities do you want to deal with?
  • Is a structure with increased formalities worthwhile at this point in your business’s lifecycle?
  • Are you happy for certain information to be made public?
  • Are exit strategies important to you, for example, are you likely to want to sell your business in the future?

A business owner organising the legal structure

What is the legal business structure of a sole trader?

A simple and agile business structure, but it can incur a lot of personal risk. Sole traders are individuals who run a business on their own with no separate legal personality or limitation of liability and no legal formalities or administration or filing requirements.

There is no separation between the management and ownership of the business, the sole trader owns all the assets personally and has full control over the business. Sole traders often rely on their own savings and perhaps secured business loans to start their business.

Costs to set up as a sole trader can be fairly minimal depending upon the type of business you are establishing; however, this business structure exposes you to more personal risk than other business structures, so it may not be suitable for a high-cost start-up.

A sole trader is considered to be ‘ self-employed ’. This means you must register with HM Revenue and Customs ( HMRC ) for self-assessment as soon as you start trading as a sole trader . You will pay income tax, make National Insurance (NI) contributions through self-assessment and will be individually responsible for paying these.

A sole trader gets the benefit of the personal tax-free threshold; however, you will be taxed at basic and higher tax rates for the profit you generate. As your profit increases, it may cease to be beneficial to remain as a sole trader.

A sole trader runs the business as an individual in their own name, although many choose to use a trading name for the business.

However, even with a trading name the business is not a separate legal entity. Sole traders receive 100% of any profit but also bear 100% of any loss and are responsible for all debts and liabilities of the business.

This means that you are personally responsible for any debts incurred by the business. This is sometimes referred to as unlimited liability. As a sole trader, you have personal liability for any business debts and any contractual obligations. An example of this might be leasing premises for a business on a two-year lease, the business fails within the first year, however, the sole trader is liable for the ongoing costs for the length of the lease.

If the sole trader defaults then the creditors can ask the courts for payment or to seize and sell personal assets to pay the money owed. These assets can include personal property, cars, in fact anything of value.

There is minimal red tape for a sole trader, there is no need to register the business with Companies House , there are no incorporation or ongoing filing requirements and your business accounts can remain private. A sole trader, however, may wish to register for VAT and some trades may require other regulatory obligations to be fulfilled. You can set your own policies and working practices and employ staff within UK employment law.

Because you can make decisions alone, it can be quick and simple to make changes to the business to adapt to changing circumstances, for example, you can change your pricing structure or change the products or services that you offer, adding new products or services or removing those you don’t have faith in.

This ability to make swift decisions and implement them quickly can be a key advantage for a sole trader in a competitive, quickly changing market. As well as being the sole decision maker, a sole trader will generally be close to their customers and can therefore be sensitive to the needs of their clients, attuned to their requirements and able to react quickly and decisively to them. A sole trader can build up trust and confidence based on personal service.

However, there are some organisations that can’t or won’t do business with sole traders; many businesses will want the extra reassurance that comes with being incorporated as a limited liability company.

As a rule, banks and other investors are wary of dealing with sole traders, again because it is a risky business structure, so raising finance to expand may prove difficult.

Winding down and closing your business as a sole trader is a relatively simple affair. A sole trader business can be wound down by settling any liabilities, collecting monies due, keeping or selling any physical or proprietary assets, distributing any residual monies to the owner and finally notifying HMRC.

Sole trader running a business

What is the legal business structure of a partnership?

Partnerships are often found in professions such as solicitors, architects, accountants and doctors, but can be found in any type of business activity. They are a streamlined set-up for business partners who know and trust each other well.

Partnerships fall into three categories:

  • Ordinary or traditional partnerships.
  • Limited partnerships.
  • Limited liability partnerships (LLPs).

Before setting up any partnership there are a number of important things to work out before you start your business.

These include:

  • The percentage ownership of each partner.
  • Who contributes what into the partnership, and whether those assets belong to the partnership or not if the business is later sold or wound up.
  • How profits and losses will be allocated.
  • How decisions will be made at meetings, and possibly whether any partner has a casting vote or more say on a particular matter.
  • The principal duties of each partner.
  • The limits of authority of each partner who makes decisions by themselves, for example you might agree that no partner can borrow or make an order for more than ÂŁ1000 without the agreement of the others.
  • The procedure for admitting a new partner.
  • The procedure for removing a partner from the partnership, or what happens when a partner decides to leave.

Ordinary or traditional partnerships

An ordinary or traditional partnership does not have any legal existence distinct from the individual partners. If a partner resigns, goes bankrupt or passes away, the partnership will need to be dissolved; however, the business can continue.

Using this type of partnership is a reasonably easy and fast method for two parties or a group of people to set up, own and manage a business. There is no upper limit on the number of partners permitted to join the partnership.

An ordinary partnership is similar to the sole trader structure, except that there are at least two business owners. Each partner registers as self-employed and submits a separate tax return; the tax and NI obligations are similar to those of a sole trader.

Ordinary partnerships are governed by the Partnership Act 1890 and many partnerships will have a partnership agreement. This sets out the various rights and responsibilities of individual partners, including stating any specified split of profits, decision-making processes and the procedure to take in case a partner leaves the partnership.

A mechanism for dealing with disagreements between the partners or deadlock situations should also be covered in the partnership agreement.

An ordinary partnership set-up is simple and very flexible, and there is no requirement to publish company accounts. An ordinary partnership has no incorporation or ongoing filing requirements, although it may be registered for VAT.

They are ‘transparent’ for tax purposes, and tax liability falls on the partners who are taxed on their share of the profits or losses of the ordinary partnership. Any profits will be shared between the partners and all of the partners are personally responsible for any losses, debts and liabilities of the business.

As a result, a third party could reclaim the whole of any debt from one single partner, in other words creditors may claim a partner’s individual assets to pay back debts, including debts built up by another partner. Should a partner leave the partnership, each of the partners left within the partnership may be jointly liable for the total sum of any debts incurred by the partnership as a whole.

There are a number of advantages of the ordinary partnership structure over that of a sole trader. These include a wider range of skills, greater availability of capital, shared decision-making, and pressure is likely to be reduced with different partners having separate key roles. However, capital can still be limited, with the same problems of raising external capital that a sole trader has.

Also, the more partners there are, the more money there may be available from their combined resources to invest into the business, which can help to fuel growth, and together their borrowing capacity is also likely to be greater.

In an ordinary partnership, the partners both own and control the business. As long as the partners can agree how to operate and drive forward the partnership, they are free to pursue that without interference from any shareholders. This can make a partnership business potentially more flexible, with the ability to adapt more quickly to changing circumstances.

Unless a formal partnership agreement has been drawn up, an ordinary partnership business can easily be dissolved at any time: this gives each partner the freedom to choose to leave if they wish to.

Partnership agreements need to be legally dissolved. If a partnership agreement has to be dissolved on the death of a partner this can cause complications in re-establishing the partnership.

Business partners discussing the legal structure of a business

Limited partnerships

A limited partnership is registered in accordance with the Limited Partnerships Act 1907. An English limited partnership must be formed between two or more persons and must carry on a business in common with a view of making profit.

Unlike an ordinary partnership, a limited partnership has two categories of partner:

  • One or more general partners who manage the business of the partnership and are liable for all debts and obligations of the firm.
  • One or more limited partners who do not participate in the management of the partnership and who have limited liability for the debts and obligations to third parties beyond the amounts they have contributed.

Limited partnerships must be registered at the Registrar of Companies, Companies House . Until registered, both types of partners are equally responsible for any debts and obligations incurred. It is usual to register immediately after the partnership agreement has been signed.

Most limited partnerships are limited to a maximum of 20 partners and each partner must separately register for self-assessment with HMRC. However, under section 717 of the Companies Act 1985 there are a number of exceptions to this rule; they relate almost exclusively to professional partnerships.

Limited liability partnerships

Limited liability partnerships (LLPs) are a popular choice for large partnerships providing professional services, for example, firms of accountants, architects or solicitors. A limited liability partnership does not have shares or shareholders, but instead has members.

An LLP is a body corporate with a legal personality separate from its members, primarily governed by the Limited Liability Partnership Act 2000. LLPs must also comply with various regulations, such as the Limited Liability Partnership Regulations 2001 and the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. These regulations modify and apply parts of the Insolvency Act 1986 and the Companies Act 2006 to be relevant for LLPs.

As an LLP, you must complete the registration process with Companies House. You should also consider creating an LLP agreement with the other partners. This document sets out how the business will be run, the rules for sharing power and the rules for sharing profits. LLPs must nominate a minimum of two designated members who will take on legal responsibilities such as filing the annual accounts. You will be required to file accounts and send an annual return to Companies House.

Accounts will be made public by Companies House, which means anyone can view them. There is substantial paperwork to complete, therefore, employing an administrator to manage this may be appropriate.

Each partner within the LLP must register as self-employed and file an individual tax return. The LLP itself will also file a partnership tax return, showing income and expenditure as well as detailing how profits and losses have been allocated between the members.

If the LLP employs people, it will need to operate a Pay as you Earn (PAYE) payroll scheme, make regular returns and pay income tax and NI that are deducted from the pay of employees to HMRC. If the LLP needs to register for VAT or chooses to register voluntarily, it will also need to submit regular VAT returns and make payments of VAT to HMRC.

The key advantage that an LLP provides over a traditional partnership, is that of limited liability of the members. The liability of each member is limited to the value of their investment in the partnership. That means the members’ personal assets won’t be at risk, unless they are guilty of wrongdoing or have provided personal guarantees.

What is the legal business structure of a private company?

There are currently over 3.5 million limited companies incorporated in the UK. With over two million registered at Companies House, private companies limited by shares are the most frequently used type of company in the UK.

They are more commonly referred to as private limited companies and must have the word ‘Limited’ or the abbreviated suffix ‘Ltd.’ at the end of their name. A limited company has one or more directors, has its own bank account(s), pays its own kind of tax, corporation tax, can be bought and sold in the form of shares, and must be registered at Companies House.

The Companies Act 2006, fully effective from 1 October 2009, made a number of changes making it easier to run a limited company. It is very easy to start a limited company and it can all be done online in just a few hours. However, if you choose not to use ‘limited’ in your company name you must register by post.

The company will usually be registered within 24 hours of receipt of your application, if you do it online; postal registrations can take up to 10 days. It costs ÂŁ12 to register your company online, and postal registrations normally cost ÂŁ40, though you can pay ÂŁ100 for a same-day postal registration if you wish.

The cost of incorporating, that is the name given to the creation of the new limited company, is an allowable expense against corporation tax. When you incorporate a business at Companies House and it is entered onto the register, it becomes separate from the person who owns or manages it – it becomes a legal entity in its own right.

Once you have registered your company, a ten-digit Unique Taxpayer Reference (UTR) will be posted to your company address within a few days. You will need this, so keep it safe. You will also receive a ‘certificate of incorporation’, confirming that the company legally exists. This document also includes the company number and date of formation.

You can set up a limited company in which you are the sole employee and only director. Your company must have at least one director and at least one shareholder, that is you, but it can have several directors and/or shareholders.

Directors collectively agree decisions for the company, must follow its rules and have ultimate responsibility for filing the accounts and ensuring the company pays its corporation tax. Shareholders typically vote on decisions at shareholder meetings, with one share equalling one vote, so majority shareholders have more influence.

A shareholder with more than 25% of the shares is a ‘person of significant control’ (PSC).

As a director you will have some legal responsibilities, including managing accounts and informing other shareholders if you stand to benefit personally from any company transactions.

At the end of your financial year you must report key information to HMRC and Companies House. This ensures that the company pays the tax it owes, and also provides accurate information about the company to its shareholders, investors, creditors and the general public.

You will need to file a company tax return annually, by the deadline given to you by HMRC. You will also need to register for PAYE if the company pays any salaries, including your own as director. Your company may also need to register for VAT, or you may wish to do this even if you don’t have to.

There are two main ways in which you as director can take an income from your company. You can take a salary, or you can pay yourself dividends out of company profits.

Most directors choose a combination of the two, as this can be the most tax efficient. The advantage of a salary, however, is that it entitles you to various other benefits such as the state pension and maternity/paternity benefits and doesn’t require the company to be in profit to pay you, although it is taxed at a higher rate.

One of the main reasons why this particular type of company set-up is so popular is that the amount for which shareholders are liable in the event that the company is wound up is limited to the reserves of the company.

Most contractors choose to operate as companies, as it reduces the risk that their clients will have to treat them as employees for tax and legal purposes. It also protects contractors from heavy personal losses if they are sued by clients.

Forming a company also opens up more ways to fund your business through private equity funding; that is, selling shares in your business.

The formation of a private limited company can suggest that the business has permanence and is committed to effective and responsible management.

It gives both suppliers and customers a sense of confidence and many companies, particularly larger businesses, will not deal with an entity that is not a limited company. Incorporating a business can therefore open up new business opportunities that would not otherwise be available.

People buying a property

What is the legal business structure of a public limited company?

A public limited company (PLC) is a limited liability company, formed in a similar way to a private limited company under the Companies Act 2006, that has chosen to raise capital by offering its shares to the general public.

They both have constitutional documents under the Act, that is, a memorandum and articles of association that have to be filed at Companies House and govern the way the company is run. The shareholders have limited liability for the debts of the business.

There are slightly different requirements for a public company than a private company, for example, a public company must have at least two directors and a company secretary, whereas a private limited company is only required to have one natural director and there is no requirement to have a company secretary.

UK company law says that a PLC must have the PLC designation after the company name and minimum share capital of ÂŁ50,000.

There are also more complex accounting and reporting requirements for a PLC. If a PLC is listed on a stock exchange, for example, but not limited to:

  • the London Stock Exchange ;
  • the New York Stock Exchange ( NYSE );
  • NASDAQ , an American stock exchange based in New York City;
  • the Tokyo Stock Exchange, abbreviated as Tosho or TSE/TYO ; or
  • the Bombay Stock Exchange ( BSE ).

There will be further reporting, corporate governance and disclosure requirements placed on it, so that potential buyers can understand the risks of their investment.

The biggest advantage of forming a PLC is that it grants the ability to raise capital by issuing public shares. A listing on a public stock exchange attracts interest from hedge funds, mutual funds and professional traders as well as individual investors. That tends to lead to increased access to capital for investment in the company than a private limited company can accrue.

Another advantage is that a PLC can offer investors a certain amount of liquidity in that investors can sell their shares fairly quickly, particularly if the shares are trading on a stock exchange.

If a PLC is planning to expand its business, it can issue shares to the public to fund activities such as:

  • Buying property.
  • Paying off its debts.
  • Starting a new project.
  • Engaging in research and development (R&D).
  • Creating a new line of business.

However, PLCs are vulnerable to hostile takeovers, that is a takeover of one company called the target company by another called the acquirer. The takeover is accomplished without the agreement of the target company’s management.

Instead, the acquirer approaches the company’s shareholders directly or fights to replace the management by acquiring shares to get the takeover approved. PLCs are also liable to instability in share valuation as the company is at the mercy of the financial markets, meaning that the value of the company can go up or down.

How should you choose?

Choosing the right legal structure is a necessary part of running a business, whether you are just starting out or your business is growing.

Choosing the right legal structure for your business starts with analysing your business goals. By defining your goals, you can pick the legal structure that best fits your business.

As your business grows, you can change your legal structure to meet your business’s new needs.

Some of the questions to ask yourself might be, am I looking for a business structure that:

  • Is easy to set up?
  • Has low costs?
  • Is easy to run?
  • Has flexibility?
  • Provides privacy?
  • Is tax efficient?
  • Provides personal protection?
  • Has scalability?
  • Is suitable for the future?
  • Is easy to exit?

Don’t take this very important decision lightly, and don’t make a choice based on what somebody else has done. Carefully consider the unique needs of your business. You may want to seek expert advice before settling on a particular legal business structure.

Colleagues working on a business structure

Changing to a different legal business structure

Although it is important to get your business structure right from the start, remember that things may change in the future and what is right for you as you are starting out may not be the structure that the mature version of your business needs.

Many famous companies started as sole proprietorships and eventually grew into multimillion-pound businesses, for example, Ingvar Kamprad owned IKEA as sole proprietor building a global furniture business from a single general goods store in rural Sweden.

Many small businesses and self-employed people start out as sole traders because it is the easiest legal structure to set up, especially when you are keen to get going with your new venture or you want to test the market. As the business grows, some small business owners make the change from sole traders to limited companies.

Here are some key steps you will need to take if you are changing your business from a sole trader to a limited company:

  • Decide whether you will be the sole director or whether you want to bring in others.
  • Tell HMRC your legal structure has changed; this is very important because changing legal structure affects the amount of tax you need to pay.
  • Choose a name for your limited company.
  • Register your business with Companies House – to do this you will need to create your memorandum and articles of association.
  • Set up a new business bank account for your limited company.
  • Tell your insurer your legal structure has changed.

It is important to take professional advice about the best option for you and your business if you are considering changing the legal business status.

Why change your business structure?

As businesses grow, evolve and change, it may make sense to change the legal structure of your business. In the vast majority of cases, small businesses change from a simple business structure such as sole proprietor or ordinary partnership to a more complex one such as a limited company or limited liability partnership.

The main reasons small businesses consider changing their business structure are:

  • Increasing the number of employees – Employees come with liability and business owners want the protection offered by a limited company or LLP, rather than being personally liable.
  • Protection from liability – In addition to the liability that comes with employees, businesses may be liable for injuries to customers, for loans, business debts and for other issues. By switching to a more formal business structure, business owners can protect their personal assets from that liability.
  • Allowing outside investment or finance – Anyone who wants to buy a portion of a business as a shareholder, become a partner or lend large sums of money is going to require a formal business structure to protect their investment. A formal business structure such as a limited company or LLP involves setting out clear rights and responsibilities at the outset.
  • Expanding client base – Many larger organisations will only do business with limited companies or LLPs; this is usually due to the level of risk involved in the contracts they award.

In conclusion

It is not always easy to decide which legal business structure to choose, as you need to consider your business’s financial needs, risk and ability to grow. Give it careful analysis in the early stages of forming your business, although you can always change the legal business structure if you need to.

Employment Law

Employment Law

Study online and gain a full CPD certificate posted out to you the very next working day.

Take a look at this course

About the author

' src=

Evie has worked at CPD Online College since August 2021. She is currently doing an apprenticeship in Level 3 Business Administration. Evie's main roles are to upload blog articles and courses to the website. Outside of work, Evie loves horse riding and spending time with her family.

Similar posts

Sustainable food packaging

Sustainable Food Packaging

Gambling Addiction And The Different Types

Gambling Addiction and the Different Types

Staff discussing safer recruitment checks

Why is it so Important to Complete DBS Checks?

Why Children May Be Keeping Quiet About Abuse

Why Children may be Keeping Quiet about Abuse

Celebrating our clients and partners.

Greggs

Startup Promise logo

  • Become an Advisor

Legal Structure of a Business

Standard Post

115 Q&A

best organizational structure

  • Recent Posts

Holly Magister, CPA

  • SAFE Instruments - October 10, 2023
  • Startup vs Acquisition – Which is Best? - August 21, 2023
  • How to Get Money to Start a Business - August 7, 2023

If you are thinking about starting a business, or if you’re a serial entrepreneur adding a new line of business, one of the first things you’ll have to do is to determine your business legal structure.

The four most common types and basic forms of business legal structures in the United States include:

  • Sole Proprietorship
  • Partnership
  • Limited Liability Company or an LLC
  • Corporation

This post is intended to help you understand which option may be the best fit to meet your business and personal goals and to explain the key differences among the various business structures.

Question & Answer

Do you have a question?  Ask at the bottom of this post.

One of our advisors will answer!

Legal Structure of a Business Plan

A business’s legal structure is a key component in any business plan. Before you can build or start your new business, you’ll need to determine what legal structure will best suit your fledgling enterprise.

In certain cases your choice of a business legal structure will determine which income tax forms you will file annually. It will also determine the type of income taxes you’ll pay on the business’ net income and, more importantly, will have a big impact on the personal liabilities you and your family may face as a consequence of business ownership.

And if you intend to sell your business, its legal structure also will have an impact on many aspects of the sale process and the taxes you eventually will be required to pay.

Sole Proprietorship Definition

A sole proprietorship is a business that is owned by one individual and who has not formed any type of business entity such as a partnership, LLC or corporation. As a sole proprietor, an individual assumes a business identity by selling products or delivering services to others under his or her personal legal name.  

Small businesses with a single owner are considered to be a sole proprietorship by default unless they officially form a separate, legal business entity. Owners of a sole proprietorship files their business taxes in conjunction with their personal taxes on a Federal Schedule C.

If an individual wants to use a name for their business activities which differs from their legal individual name, they must file for a fictitious name for the sole proprietorship. A fictitious name is also known as a DBA which is an acronym for ‘Doing Business As’. Those whose chose this type of trade name for their sole proprietorship do not gain any additional protections from legal liability. The fictitious name certificate merely grants the sole proprietor the right to use the alternative DBA trade name on his or her business signs, invoices, investment accounts, leases, business contracts, business checking accounts, etc.  

Choosing to be a sole proprietor means the individual owner accepts unlimited liability for the business along with all of its debts, including all known and unknown liabilities. This type of unlimited liability exposure means that in the event the business faces a lawsuit, or does not have the ability to pay any of its debts, the owner’s personal property, assets, and other income will be at risk in addition to the business’s assets.  

The unlimited liability nature of a sole proprietor is due to the fact  there is no legal separation between the income, assets, and liabilities of an individual and business. Whatever is owned by the individual, including any assets and income built up or earned in the sole proprietor’s business is  accessible to any creditor of the individual. The reverse is also true.

Sole Proprietor Tax Treatment

Many people mistakenly believe that if they do not have a business entity formed and they sell products or their services to others, they do not have to report their income and expenses to the IRS. This is not the case. By default, people in this situation are considered to be operating a sole proprietorship.

The advantage to a sole proprietorship is that the owner doesn’t need to file taxes separately or comply with any special government filings or ongoing reporting. However the disadvantage of a sole proprietorship is that if something goes wrong on the business side (debts, liabilities or legal problems), the individual owner may lose both business and personal assets and income. And if the individual or his or her spouse are sued outside of the business, any assets and income associated with a business operated as a sole proprietorship are at risk of loss.

Partnership Definition

Partnerships are essentially two or more sole proprietorships operating under a single entity. If two or more individuals begin working together in a business operation and have not formally formed a partnership, LLC or Corporation, by default, the business operation is regarded as a General Partnership.  

Partnerships establish one General Partner and he or she has unlimited liability for the partnership. Conversely, a Limited Partner’s personal assets are at risk only to the extent of the Limited Partner’s investment in the business.

One of the major advantages of a partnership is that more owners often will result in more resources. Together, multiple owners can pool capital, skill sets, and networks to create an advantage as they operate their business.  

Business Partnership Agreement

One of the largest risks associated with operating a business as a partnership is if a partner makes a serious mistake which has legal ramifications or otherwise no longer works amicably within the business relationship. For this reason, it’s very important to take the time to carefully draft and execute a partnership agreement to address important partner matters such as compensation, distributions, retirement, buy-sell arrangements, disability and other potential dispute-resolution methods.

Partnership Tax Treatment

Partnerships are required to file a federal tax return every year. And in most states, a similar tax return is often required. A Federal form 1065 is filed on behalf of the partnership and its partners. The income (or losses), certain deductions, and guaranteed payments paid to the partners from the partnership are passed through to the partners. Each partner receives a federal form 1065 K-1 that identifies the items of income and expenses which should be reported on the partner’s individual federal tax return.

Limited Liability Company or LLC Definition

An LLC offers the best of two worlds. It is taxed like a sole proprietorship yet it offers limited liability protections for its members, similar to those protections offered to shareholders of a corporation.

LLC owners are called members and they may use losses incurred by the LLC to offset income up to the total amount the owner has invested, but not more.

In the event the business runs into legal or financial trouble, the owner’s personal assets have more protection than those of a sole proprietorship – however that protection is limited.

And LLCs may be subject to additional state and/or franchise taxes separate from its member/owners.

Limited Liability Company Advantages

If you’re contemplating the formation of an LLC over a sole proprietorship, note the LLC will offer you more personal liability protection and be perceived by customers, vendors, employees, and others as an established business operation.

In addition, LLCs are simpler to form than a Corporation and generally cost less to operate from an administrative perspective. LLCs also offer members much flexibility regarding how profits and losses are shared between members and how distributions may be made.

Limited Liability Company Operating Agreement

One of the key steps a business owner should take when forming an LLC (either as a single-member LLC or as a multi-member LLC, is the development of an Operating Agreement for its member(s).  

The LLC Operating Agreement should spell out clearly what is expected of  members, which members have what roles and responsibilities, how profits and losses will be shared, how and when distributions may be made, and how ownership may be bought or sold in the future, among other important matters.

Limited Liability Company Tax Treatment

LLCs are taxed on their profits for federal tax purposes in one of several ways:

  • By default, a single member LLC is treated as a sole proprietorship and if it has multiple members, the LLC is treated as a partnership; and alternatively
  • If elected separately, the LLC may choose to be treated as a C Corporation, or as an S Corporation for federal tax purposes.

Most states automatically recognize the same tax treatment or any alternative elections, however it’s wise to verify this with the state in which your Limited Liability Company is formed and/or conducts its business.

Corporation Definition

A corporation is a separate legal and taxable entity, which is independent from its owners who are called shareholders.

Because the business is treated as a separate legal entity, there is less risk to the owner’s personal assets. Corporations may have one or many shareholders, all of whom have the right to profits through dividends in the form of cash and/or additional shares of stock, but who are not held personally liable for the business’s debts and legal issues.

If you have (or plan to have) more than one business under your ownership, read more about how multiple business structures can face different tax consequences here .

Corporation Formalities

One of the biggest differences between a corporate structure and all other forms of business structures is the formalities the officers and directors must maintain to retain the corporation’s independent, or separate legal status from its shareholders.  

Such formalities start when the business is formed. A corporation must file formal Articles of Incorporation, hold a meeting of its shareholders to authorize the formation of the business entity, issue shares of stock (certificates) to its shareholders, publish a formation notice in one or more legal journals, to name a few.  

Any time a decision is made by the corporation’s Board of Directors or Officers, such a decision must be voted upon, approved, and recorded in the Corporate Minutes. And everything must be entered into the corporation’s books and records.

Holding an Annual Meeting of the Shareholders is also a requirement and so is the documentation of any decisions made at the meeting.  

Corporation Taxation

By default a corporation is treated for federal tax purposes under U.S. Title 26; Subtitle A; Chapter 1; Sub Chapter C (the C Corp).

C Corporations are taxed solely on their income and the business’s income and losses are not reported on the owner’s personal tax returns. A federal tax form 1120 is filed by the corporation each year.

Distribution of corporate dividends received by the shareholders of a corporation are taxable at the federal level and in most cases at the state level.

If by election, the shareholders of a corporation choose to elect Sub Chapter S federal tax treatment, then the income, expenses and certain other tax credits will not be taxed at the corporation’s level. Instead, they pass-through to the shareholders according to their respective ownership percentage and each shareholder reports these on their personal tax returns.

When a corporation has elected Sub Chapter S tax treatment, then a federal form 1120S is filed by the corporation each year and each shareholder receives a federal schedule K-1 to report his/her pro-rata share of the business income on their personal tax return.

Each state has its own rules with regard to how C Corporations and S Corporations are treated for tax purposes.  In some states, additional franchise taxes are also paid by corporations, regardless of their federal tax status.

Other Various Business Types and Structures

Benefit corporation.

Benefit Corporations are relatively new in the United States and are not recognized in all states. It is a for-profit business entity (which means it pays income taxes on its profit) while its purpose must have a positive impact on society and/or the environment.

Limited Liability Partnership – LLP

LLPs are similar to a Professional Corporation as they are suitable for those employee-owners who provide certain services.  The underlying business entity in the case of the LLP is a partnership and not a corporation.

Non-Profit Entity

A non-profit entity is not a separate business entity at all. Instead, it is a corporation which has applied for and obtained permission from the Internal Revenue Service to be treated under one of the non-profit tax codes. This designation as a non-profit by the IRS is only awarded after a lengthy application and vetting process. Upon its award, the corporation is no longer subject to federal income taxes.

Professional Corporation – P.C.

When employee-owners provide personal services in the fields of accounting, actuarial science, architecture, consulting, engineering, health, veterinary, law, and the performing arts, the corporation is considered to be a Professional Corporation and is subject to specific tax rules which differ from the rules applicable to C Corporations and S Corporations.

Professional Limited Liability Company – PLLC

Similar to a Professional Corporation, the PLLC may be used when employee-owners provide certain personal services under a Limited Liability Company entity structure.

Certain states permit a single LLC to be formed and to serve as the master of a series of LLCs . Each LLC in the series is called a cell. 

For those states which offer this form of multiple business structure, the LLC cells held in the series are considered to be a single entity from a legal perspective.

This form of multiple LLC structure is relatively new and is not recognized in all states. Recently, the IRS has been attempting to simplify the taxation of Series LLCs. With that said, caution should prevail as there is little case law supporting the limitation of liability when a Series LLC’s business operations cross state lines.  

You may read more in Part Two in this Series about How to Structure Multiple Businesses Under a Single Business Entity.

How do I know what company to use to file for an LLC

Hi Felicia, Not certain what you are asking. If you’re looking for a service to file for your LLC, here’s a resource . If that’s not what you’re asking here, let me know. All the best…

Billing for a doctor and also would like to starts food cart truck

Hi Kelli, I am not certain what you are asking. Would you please expand on your situation/question and then I will give it a whirl?

Hello Everyone! 1st of all, Thank you so much for creating this space and for having the heart in helping others grow! Internet research can keep you chasing your tail sometimes. Over the past few years I’ve grown a mobile grooming salon into a brick and mortar, specializing in “Low Anxiety” (kind of our branding) I’m now opening a second location and my future hopes are to offer to franchising. As Im setting up the second location and still having the Mobile business… Ive LLC’d the two older business, ea with its own EIN but I’m not sure how to properly structure the new one and the futures to come. I also LLC’d and EIN’d a parent/holding company name (ZoeCompanies) but don’t know if there are additional forms to identify it being that and then how to go about listing these others under that umbrella? OR if that’s even the way I should go, I also, created a pet taxi and grooming academy intity, for future. Can you please advise on the proper way of accomplishing the correct structure… I feel so lost and not sure how to proceed, especially now that its tax season.

Hi, Julie: Since this is a public forum and your question is pertinent to you only, I would recommend that you visit your Tax Advisor to discuss your goals first. Anybody can string together entities, but if they are done ignorant of your specific situation, it is no more effective than going to a car lot and picking out the prettiest color regardless of what type of vehicle you actually need. If you don’t have a tax advisor that specializes in tax planning, we can certainly assist, as this is the type of work we specialize in as a firm. More than happy to provide a no-cost initial call.

Hi Julie, Given your intent to offer franchises, I highly recommend addressing your business entity structure with a business attorney licensed in your state. And establishing proper liability insurance for all of your businesses is a very important first line of defense. A good agent, who understands all of your business activities/entities, will pay off if you ever have a serious liability issue. You appear to be a very ambitious and busy young lady Julie! All the best…

Session expired

Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page.

isalegal

The best way to get a bad law repealed is to enforce it strictly.

Legal Structure Of A Business Plan Example 10 min read

YouTube video

When starting a business, you will need to create a business plan. This document will outline your business goals, strategies, and how you plan to achieve them. Part of your business plan will be the legal structure of your business. There are several different types of legal structures, and each has its own benefits and drawbacks. Here is a brief overview of the four most common legal structures for businesses.

Sole Proprietorship

A sole proprietorship is the simplest type of business structure. It is owned and operated by one person and there is no legal distinction between the owner and the business. This is the most common type of business structure in the United States. The primary benefit of a sole proprietorship is that it is easy and inexpensive to set up. The owner is also responsible for all debts and liabilities of the business.

Partnership

A partnership is a business structure owned and operated by two or more people. Partnerships are similar to sole proprietorships, but have the added benefit of shared liability. This means that if one partner incurs debts or liabilities, the other partners are also responsible. Partnerships are also less expensive to set up than corporations.

Corporation

A corporation is a legal entity that is separate and distinct from its owners. This means that the corporation can own property, sue and be sued, and enter into contracts. The primary benefit of a corporation is that it offers liability protection to its owners. This means that if the corporation incurs debts or liabilities, the owners are not responsible. Corporations are also more expensive to set up than sole proprietorships or partnerships.

Limited Liability Company (LLC)

A limited liability company is a hybrid business structure that combines the benefits of a corporation and a partnership. LLCs offer liability protection to their owners and are less expensive to set up than corporations.

Table of Contents

What is the legal structure of a business plan?

When starting a business, one of the first steps is creating a business plan. This document outlines the goals and strategies of a business, and is essential for obtaining funding and attracting investors. There are a variety of legal structures you can choose for your business plan, each with its own advantages and disadvantages.

The most common legal structures for businesses are sole proprietorships, partnerships, and corporations. A sole proprietorship is the simplest business structure, and is owned and operated by a single individual. There are no formal registration or filing requirements, and the owner is responsible for all liabilities incurred by the business. A partnership is a business structure owned by two or more people. Like a sole proprietorship, there are no registration or filing requirements, and the partners are responsible for all liabilities incurred by the business.

YouTube video

A corporation is a more complex business structure, and is owned by shareholders. The corporation is a separate legal entity, and is responsible for its own liabilities. The shareholders are not personally liable for the debts of the corporation. In order to form a corporation, you must file articles of incorporation with your state government.

There are a number of other business structures you can choose, including limited liability companies (LLCs) and S corporations. LLCs are hybrids between a corporation and a partnership, and offer the limited liability of a corporation while preserving the pass-through taxation of a partnership. S corporations are similar to LLCs, but are subject to additional restrictions and are only available to certain types of businesses.

When choosing a business structure, it’s important to consider the legal and tax implications. Each structure has its own set of rules and regulations, so be sure to consult with an attorney or accountant to determine which is the best fit for your business.

What is an example of a legal structure?

An example of a legal structure is a company. A company is a type of legal structure in which a group of people come together to form a separate entity that is recognized by law. This entity can then enter into contracts, own property, and sue and be sued. Companies are a popular choice for businesses because they offer limited liability to the owners. This means that the owners are only liable for the amount of money that they have invested in the company.

What are the 3 basic types of legal structures for businesses?

When starting a business, one of the first decisions you’ll need to make is what legal structure to use. There are three basic types of legal structures for businesses: sole proprietorship, partnership, and corporation.

Sole proprietorship is the simplest and most common type of business structure. It’s simply a business owned by one person. There are no special requirements to set up a sole proprietorship, and it’s the easiest type of business to start. The downside is that the owner is personally liable for all the debts and liabilities of the business.

Partnership is similar to a sole proprietorship, but it’s owned by two or more people. Like a sole proprietorship, there are no special requirements to set up a partnership, and it’s also the easiest type of business to start. The downside is that the partners are personally liable for all the debts and liabilities of the business.

Corporation is a more complex business structure than a sole proprietorship or partnership. It’s a legal entity separate from the owners, and it has its own legal rights and liabilities. Corporations are more expensive and difficult to set up than other business structures, but they offer some advantages, such as limited liability for the owners.

What are the six types of legal structures?

There are six types of legal structures in the United States: sole proprietorship, general partnership, limited partnership, corporation, S corporation, and limited liability company (LLC). The legal structure you choose for your business will impact your personal liability, taxes, and how easy it is to raise money.

YouTube video

Sole proprietorship is the simplest legal structure and is just you and your business. You are personally liable for all the debts and obligations of the business, and taxes are filed and paid on your individual income tax return.

A general partnership is also simple and just involves two or more people working together. Each partner is personally liable for the debts and obligations of the partnership, and taxes are filed and paid on each partner’s individual income tax return.

A limited partnership has one or more general partners who are personally liable for the debts and obligations of the partnership and one or more limited partners who are not liable for the debts and obligations of the partnership. Limited partners are only liable to the extent of their investment in the partnership. Taxes are filed and paid on the individual income tax returns of the general partners.

A corporation is a more complex legal structure with separate legal and financial liabilities from its owners. Corporations are required to have bylaws and hold annual meetings. Taxes are filed and paid on the corporate income tax return.

An S corporation is a special type of corporation that is taxed like a partnership. This means that the corporation’s income and losses are passed through to the shareholders and are reported on their individual income tax returns. S corporations are limited to 100 shareholders and must have a formal organizational structure.

A limited liability company (LLC) is the most recent type of business structure and provides the liability protection of a corporation with the tax treatment of a partnership. An LLC can have an unlimited number of members and does not have to have a formal organizational structure.

So, which legal structure is right for you? That depends on a number of factors, including the size of your business, your liability risk, and your tax situation. You should consult with an attorney or accountant to help you decide which structure is best for your business.

What are the five legal business structures?

There are five common legal business structures in the United States:

1. Sole proprietorship: This is the most basic and simplest business structure, in which one person owns the entire business. There is no legal distinction between the business and the owner, and the owner is liable for all business debts and obligations.

2. Partnership: A partnership is a business owned by two or more people. Partners are equally liable for business debts and obligations, and the partnership itself is not a separate legal entity.

3. Corporation: A corporation is a separate legal entity, owned by its shareholders. The shareholders are not liable for the corporation’s debts and obligations, and the corporation is taxed separately from its owners.

YouTube video

4. Limited liability company (LLC): An LLC is a separate legal entity, owned by its members. Members are not liable for the LLC’s debts and obligations, and the LLC is taxed separately from its members.

5. Cooperative: A cooperative is a business owned and operated by its members, who are also its customers. Cooperatives are not typically registered as a legal business structure, but they are governed by specific state and federal laws.

What is the best type of business legal structure?

There are a variety of business legal structures to choose from, each with its own benefits and drawbacks. The best type of business legal structure for your business will depend on the size and nature of your business, as well as your personal preferences.

The most common business legal structures are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Let’s take a closer look at each one.

Sole proprietorships are the simplest business legal structure. There is no legal separation between the business and the owner, so the owner is personally liable for any debts or legal judgments against the business. However, sole proprietorships are relatively easy and inexpensive to set up and manage.

Partnerships are similar to sole proprietorships, but involve two or more owners. Like sole proprietorships, partnerships are easy and inexpensive to set up and manage, and the owners are personally liable for the business’s debts and legal judgments.

Limited liability companies (LLCs) are a popular choice for small businesses, as they offer the limited liability of a corporation, but are much simpler and less expensive to set up and manage than a corporation. LLCs are a good choice for businesses that want the liability protection of a corporation without the complexity and cost of setting up and managing a corporation.

Corporations are the most complex and expensive business legal structure to set up and manage. However, they offer the greatest liability protection for the owners. Corporations are a good choice for businesses that want to protect their personal assets from any legal judgments against the business.

What is meant by legal structure?

The legal structure of a business is the framework that governs how it is run and how its assets are divided. It is important to get this structure right from the outset, as it can be difficult to change later on. There are a number of different legal structures to choose from, each with its own advantages and disadvantages.

The most common legal structures are sole proprietorship, partnership, limited liability company (LLC), and corporation. Sole proprietorships and partnerships are relatively easy and inexpensive to set up, but offer little in the way of protection from liability. LLCs are more expensive to set up than sole proprietorships and partnerships, but offer limited liability protection to their owners. Corporations offer the most protection from liability, but are also the most expensive and complex to set up.

It is important to choose the right legal structure for your business, as it will have a big impact on how it is run and how much liability you are exposed to. Talk to an attorney to help you decide which structure is right for you.

what is a legal structure in a business plan

Published by Dean Wallace

View all posts by Dean Wallace

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

  • Auto Insurance Best Car Insurance Cheapest Car Insurance Compare Car Insurance Quotes Best Car Insurance For Young Drivers Best Auto & Home Bundles Cheapest Cars To Insure
  • Home Insurance Best Home Insurance Best Renters Insurance Cheapest Homeowners Insurance Types Of Homeowners Insurance
  • Life Insurance Best Life Insurance Best Term Life Insurance Best Senior Life Insurance Best Whole Life Insurance Best No Exam Life Insurance
  • Pet Insurance Best Pet Insurance Cheap Pet Insurance Pet Insurance Costs Compare Pet Insurance Quotes
  • Travel Insurance Best Travel Insurance Cancel For Any Reason Travel Insurance Best Cruise Travel Insurance Best Senior Travel Insurance
  • Health Insurance Best Health Insurance Plans Best Affordable Health Insurance Best Dental Insurance Best Vision Insurance Best Disability Insurance
  • Credit Cards Best Credit Cards 2024 Best Balance Transfer Credit Cards Best Rewards Credit Cards Best Cash Back Credit Cards Best Travel Rewards Credit Cards Best 0% APR Credit Cards Best Business Credit Cards Best Credit Cards for Startups Best Credit Cards For Bad Credit Best Cards for Students without Credit
  • Credit Card Reviews Chase Sapphire Preferred Wells Fargo Active CashÂź Chase Sapphire Reserve Citi Double Cash Citi Diamond Preferred Chase Ink Business Unlimited American Express Blue Business Plus
  • Credit Card by Issuer Best Chase Credit Cards Best American Express Credit Cards Best Bank of America Credit Cards Best Visa Credit Cards
  • Credit Score Best Credit Monitoring Services Best Identity Theft Protection
  • CDs Best CD Rates Best No Penalty CDs Best Jumbo CD Rates Best 3 Month CD Rates Best 6 Month CD Rates Best 9 Month CD Rates Best 1 Year CD Rates Best 2 Year CD Rates Best 5 Year CD Rates
  • Checking Best High-Yield Checking Accounts Best Checking Accounts Best No Fee Checking Accounts Best Teen Checking Accounts Best Student Checking Accounts Best Joint Checking Accounts Best Business Checking Accounts Best Free Checking Accounts
  • Savings Best High-Yield Savings Accounts Best Free No-Fee Savings Accounts Simple Savings Calculator Monthly Budget Calculator: 50/30/20
  • Mortgages Best Mortgage Lenders Best Online Mortgage Lenders Current Mortgage Rates Best HELOC Rates Best Mortgage Refinance Lenders Best Home Equity Loan Lenders Best VA Mortgage Lenders Mortgage Refinance Rates Mortgage Interest Rate Forecast
  • Personal Loans Best Personal Loans Best Debt Consolidation Loans Best Emergency Loans Best Home Improvement Loans Best Bad Credit Loans Best Installment Loans For Bad Credit Best Personal Loans For Fair Credit Best Low Interest Personal Loans
  • Student Loans Best Student Loans Best Student Loan Refinance Best Student Loans for Bad or No Credit Best Low-Interest Student Loans
  • Business Loans Best Business Loans Best Business Lines of Credit Apply For A Business Loan Business Loan vs. Business Line Of Credit What Is An SBA Loan?
  • Investing Best Online Brokers Top 10 Cryptocurrencies Best Low-Risk Investments Best Cheap Stocks To Buy Now Best S&P 500 Index Funds Best Stocks For Beginners How To Make Money From Investing In Stocks
  • Retirement Best Gold IRAs Best Investments for a Roth IRA Best Bitcoin IRAs Protecting Your 401(k) In a Recession Types of IRAs Roth vs Traditional IRA How To Open A Roth IRA
  • Business Formation Best LLC Services Best Registered Agent Services How To Start An LLC How To Start A Business
  • Web Design & Hosting Best Website Builders Best E-commerce Platforms Best Domain Registrar
  • HR & Payroll Best Payroll Software Best HR Software Best HRIS Systems Best Recruiting Software Best Applicant Tracking Systems
  • Payment Processing Best Credit Card Processing Companies Best POS Systems Best Merchant Services Best Credit Card Readers How To Accept Credit Cards
  • More Business Solutions Best VPNs Best VoIP Services Best Project Management Software Best CRM Software Best Accounting Software
  • Manage Topics
  • Investigations
  • Visual Explainers
  • Newsletters
  • Abortion news
  • Coronavirus
  • Climate Change
  • Vertical Storytelling
  • Corrections Policy
  • College Football
  • High School Sports
  • H.S. Sports Awards
  • Sports Betting
  • College Basketball (M)
  • College Basketball (W)
  • For The Win
  • Sports Pulse
  • Weekly Pulse
  • Buy Tickets
  • Sports Seriously
  • Sports+ States
  • Celebrities
  • Entertainment This!
  • Celebrity Deaths
  • American Influencer Awards
  • Women of the Century
  • Problem Solved
  • Personal Finance
  • Small Business
  • Consumer Recalls
  • Video Games
  • Product Reviews
  • Destinations
  • Airline News
  • Experience America
  • Today's Debate
  • Suzette Hackney
  • Policing the USA
  • Meet the Editorial Board
  • How to Submit Content
  • Hidden Common Ground
  • Race in America

Personal Loans

Best Personal Loans

Auto Insurance

Best Auto Insurance

Best High-Yields Savings Accounts

CREDIT CARDS

Best Credit Cards

Advertiser Disclosure

Blueprint is an independent, advertising-supported comparison service focused on helping readers make smarter decisions. We receive compensation from the companies that advertise on Blueprint which may impact how and where products appear on this site. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impact any of the editorial content on Blueprint. Blueprint does not include all companies, products or offers that may be available to you within the market. A list of selected affiliate partners is available here .

How to start a small business at home in 2024

Blair Travers

Sierra Campbell

Sierra Campbell

“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.

Published 8:07 a.m. UTC Feb. 16, 2024

  • path]:fill-[#49619B]" alt="Facebook" width="18" height="18" viewBox="0 0 18 18" fill="none" xmlns="http://www.w3.org/2000/svg">
  • path]:fill-[#202020]" alt="Email" width="19" height="14" viewBox="0 0 19 14" fill="none" xmlns="http://www.w3.org/2000/svg">

Editorial Note: Blueprint may earn a commission from affiliate partner links featured here on our site. This commission does not influence our editors' opinions or evaluations. Please view our full advertiser disclosure policy .

Featured Image

PeopleImages, Getty Images

Starting a small business at home can help you turn your passions, skills or ideas into financial prosperity. There are some unique perks and challenges to consider when deciding to start a home-based business. 

You’ll also want to have a solid plan and follow some key steps to get your business off on the right foot. It’s helpful to know where you can find ideas, answers to your questions and other resources you need to run an at-home business successfully.

Should you start a business at home?

There are many factors to consider when deciding to start a small business at home. On the one hand, it’s important to make sure there is demand for your business. On the other hand, you want to be able to handle the amount of business you receive. Gauging things like demand, profit margins and the ability to scale your business early on can help you avoid trouble down the road.

Across the country, at-home businesses make up a large portion of small businesses. C.E. “Tee” Rowe is the president and CEO of America’s Small Business Development Centers (SBDC), which provides free or low-cost support for small businesses in partnership with the U.S. Small Business Administration. “Here at America’s SBDC, we have seen an uptick in home-based businesses that started during the pandemic but continues to date,” said Rowe. 

Pros of a home business

Here are some key benefits to starting a business at home:

  • Increased flexibility: Set your own hours, freeing you up for other commitments as needed.
  • Less commuting: Save time and money by skipping the drive to work.
  • Comfortable work environment: Design your workspace how you want it. After all, it is your home.
  • Money-saving perks: Pay lower startup costs compared to larger businesses by avoiding costs like renting retail or office space. Take advantage of tax breaks for at-home businesses.
  • Reduce risk: Protect yourself by limiting your liability and avoiding the cost and risk of maintaining commercial space.
  • Rewards for your hard work: Work hard for your business, and your business reaps the benefits instead of some other employer.

Cons of a home business

These are some of the disadvantages of starting a business at home:

  • Limited space: You give up part of your home, and even then, you may still need more space for your business.
  • Distracting work environment: Crying babies, barking dogs and loud neighbors can all be distracting when running a business at home.
  • Professional boundaries: Some people may feel awkward about meeting to discuss business at your home or a public location.
  • Increased mental health risks: Running a home business can feel isolating for some. A lack of social interaction, time outside, work-life balance or effective time management can also threaten mental health.
  • Growth restrictive: If your home-based business scales too rapidly, you may outgrow your workspace quickly. In this situation, success creates a problem for home businesses to solve.
  • Increased costs: Whether you’re paying new employee salaries or wages or forking over more money for higher utility bills, you may feel the financial squeeze.

Featured LLC service offers

Zenbusiness.

what is a legal structure in a business plan

Via ZenBusiness’ Website

Free version available

Lowest published package price

what is a legal structure in a business plan

Via LegalZoom’s Website

Northwest Registered Agent

what is a legal structure in a business plan

Via Northwest’s Website

7 steps to start a home business

After considering the pros and cons, does the idea of taking the reins and starting a home business appeal to you? You’re not alone. 

“When we work with individuals seeking to start a home-based business, it is frequently based on a desire to control their own circumstance and success, which are great reasons, but it always needs to be thought out carefully,” Rowe explained.

Planning is key. From creating a business plan and determining your business structure to securing funding and setting your marketing strategy, there’s a lot to think through. Follow the steps below to get on the right track to starting a small business at home.

1. Find your niche

Plenty of successful at-home businesses arise from emotion: a passion to do what you love, a frustration with the status quo or excitement to seize on a timely opportunity.

If you’re struggling to find your niche, ask yourself:

  • What do you love to do that others may find challenging?
  • What is a need that no business currently has the right solution for?
  • What are you good at? What do people ask for your help with?
  • What high-demand skills or services do you have to offer?

2. Draft a business plan

Having a business plan is essential for running your business effectively. As Rowe pointed out, “Every business needs a solid, comprehensive plan to guide them to success. That plan needs to focus on skills, finance, revenue and marketing.”

A business plan outlines the direction of the business — its goals, strategies, structure, ways of measuring success and plans for dealing with things like change and risk. Simply put, it’s the roadmap to success for your business.

When creating your business plan, include key sections such as an executive summary, a business description, market analysis and financial projections. For more on what to cover, check out this step-by-step guide to drafting a business plan .

3. Select a business structure

According to the IRS, the most common business structures are sole proprietorships, partnerships , corporations and limited liability companies (LLC) . Each business structure comes with its own set of operational, legal, financial and tax considerations. 

A sole proprietorship is a business owned and operated by a single individual, while a partnership is jointly owned by two or more individuals who share responsibilities. 

In contrast, corporations — like C corporations and S corporations — are independent legal entities. C corporations limit shareholder liability but are highly complex. S corporations feature pass-through taxation, distributing income (and losses) to shareholders.

While sole proprietorship is a common structure for just starting out, LLC is another popular option for at-home businesses. It combines elements of a corporation and a partnership, offering limited liability to its members and the flexibility of pass-through taxation. Members of an LLC can choose to be taxed as a sole proprietorship, partnership, C corporation or S corporation.

4. Register your business and get an EIN

After you choose a business structure, you’ll need to register your business with state and federal governments. Select a business name , pay fees and provide required documents, which vary by state.

After getting registered with your state, you can then apply for an Employer Identification Number (EIN) from the IRS. Once you’re approved, you’ll receive this unique nine-digit number that is essential for all sorts of business purposes, from filing your taxes to hiring employees. 

Not all businesses need an EIN, such as sole proprietors and single-member LLCs with no employees.

5. Get any required licenses and permits

Depending on your industry and federal, state and local requirements, you may also need to obtain licenses and permits for your business. 

Here are some examples of licenses and permits you may need, depending on your business:

  • Occupational, professional or trade licenses.
  • Online business permits.
  • Sales tax permits.
  • Health department permits.
  • Safety permits.
  • Home-based child care licenses.
  • Zoning, signage, environmental and other permits to operate an at-home business, as required by local government, HOA or deed restrictions.

6. Obtain funding for your business

Many owners fund their businesses using their own savings. Self-funding is a viable choice if you can get up and running without much money, can come up with the needed funding from your own accounts or can ask for help from family or friends. 

You can also apply for a business loan . Banks will likely want to see a rock-solid business plan, strong financial projections, good personal and/or business credit history and any collateral you’ll use for your loan. If you are a good candidate for lending, make sure that shows in your application so that you can get the best funding and terms for your business.

If you don’t have much personal or business credit history, it may be easier to get a business credit card . This gives you benefits like payment flexibility, credit card rewards and essential early or emergency spending power. It will also help your business establish or strengthen its credit so you can get favorable terms on future loans and other credit.

7. Launch and market your business

You’ve planned out your business, defined its structure and gotten your business registered, licensed, permitted and even paid for. Now it’s showtime. For many who seek to start a small business at home, the launch is the most exciting part of the journey. You are now ready to conduct business.

It’s also important to get others excited about your small business — and keep them engaged. Here are some of the most common marketing strategies for small home-based businesses:

  • Social media marketing: Reach potential customers on platforms like Facebook, Instagram, TikTok and X (formerly Twitter) by sharing engaging content and updates.
  • Business website: More than just a place to sell your products or services online, your business website should help users find what they want to meet their needs. It should also help achieve business objectives by offering features like payment services or e-commerce functionality .
  • Advertising: Platforms such as search engines and social media can help you reach your target audience.
  • Content marketing: Write blog posts, produce videos or create helpful graphics to explain what your business offers and to establish trust and authority.
  • Email marketing: To keep business coming back, build an email list to communicate using promotions, newsletters and updates.
  • Word of mouth: In the early stages, many small home-based businesses rely on word of mouth. You can also ask for customer reviews on platforms like Google and Yelp.

Weigh the costs and benefits when deciding on your marketing plan, so you choose what’s best for your business.

Top home business ideas

Check out these home business ideas to find the right fit for you:

  • Retail: Sell products you make — including crafts and customized gifts — or resell products you get for less than what you pay for them.
  • Case-based services: Open up an in-home daycare, provide home-based care for adults or even take care of pets by offering pet sitting and mobile grooming.
  • Events: Plan weddings and events. Create the perfect look as a makeup artist or stylist. Play music in a band or take your place on the 1s and 2s as a DJ.
  • Art and creative services: Capture the moment as a photographer, or maybe you’d rather bring your vision to life as an artist. More of a words person? Write, edit or translate content. 
  • Education: Teach the next generation how to do math, play an instrument or learn a new language. Provide adults with specialized training in arts and crafts, life coaching or test preparation.
  • Health and wellness: Become a personal trainer to get people in the best shape of their lives or a mental health counselor to help them find their inner peace.
  • Home and real estate: Transform homes by organizing, decorating or even staging. Produce virtual home tours for real estate agents, or become a realtor yourself.

Resources to start a business

For more resources and guidance on how to start a small business at home, check out these guides and articles:

  • Follow our step-by-step guide on how to start a business from the ground up.
  • Learn how to start an LLC if that’s your chosen business structure.
  • Discover how to start a business with no money so funding doesn’t hold you back.
  • Skip the overhead that comes with brick-and-mortar stores and find out how to start an online business .
  • Explore options to accept payments online and start making money in your sleep.
  • Find the cheapest payroll services to pay your employees and contractors.
  • Build a successful business by attracting loyal, repeat customers. 

Frequently asked questions (FAQs)

The cost of starting a business at home varies widely and depends on several factors. Some businesses, including sole proprietorships, can get away with paying little to no money to start their business. Other home-based businesses, including those with manufacturing or inventory expenses, could have considerably higher startup costs.

Yes, you can use your home address to register a business. However, you’ll want to make sure that usage does not go against local laws, HOA bylaws or property covenants. It’s also a good idea to check with your mortgage and homeowners insurance companies to make sure that running a business out of your home does not introduce unforeseen headaches.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy . The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Blair Travers

Blair Travers is a business writer and content strategist with over a decade of experience breaking down complex problems to help businesses move forward with confidence. He brings a wide range of technology, banking and retail expertise. Blair enjoys helping businesses figure out complex processes and make choices that are right for them. His work has been published in U.S. News & World Report and Carfax.

Sierra Campbell is a small business editor for USA Today Blueprint. She specializes in writing, editing and fact-checking content centered around helping businesses. She has worked as a digital content and show producer for several local TV stations, an editor for U.S. News & World Report and a freelance writer and editor for many companies. Sierra prides herself in delivering accurate and up-to-date information to readers. Her expertise includes credit card processing companies, e-commerce platforms, payroll software, accounting software and virtual private networks (VPNs). She also owns Editing by Sierra, where she offers editing services to writers of all backgrounds, including self-published and traditionally published authors.

How to start a small business: A step-by-step guide

How to start a small business: A step-by-step guide

Business Eric Rosenberg

  • Account management
  • Company information

What type of entity is my business?

The type of tax return that your business is required to file will depend on the legal structure of your business entity. Different business structures have different tax implications and reporting requirements. Here's a breakdown of the common business entity types and the corresponding tax returns they typically need to file:

Partnership (1065)

A partnership is a business with two or more individuals or entities that are owners. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business. An LLC with more than one owner is usually treated as a partnership.

S-Corp (1120-S)

Income and deductions from an S corporation “pass-through” to each shareholder to be reported on their personal income tax returns. An S-corp must operate as a domestic corporation, have only one class of stock, and have no more than 100 U.S. shareholders. You must file Form 2553 to elect S-corp treatment by the IRS. An LLC can make this election.

Sole Proprietorship (1040 Sch. C)

Are owned by one person—you don't have any partners. If you are a sole proprietor, your business income and expenses should be reported on Schedule C of your personal return (Form 1040). If you run the business as an LLC and you are the sole owner, the IRS also considers you to be a sole proprietor that also uses Schedule C.

Is the business an LLC?

If you operate a business using a single or multi-member limited liability company (LLC), then you have more flexibility in choosing how the IRS taxes your business earnings. Your choice will directly influence the tax filing rules you are subject to. There's no set of tax rules that specifically apply to LLCs. The IRS allows an LLC to use partnership, corporate (C-corp or S-corp) or sole proprietor tax rules.

How would I be able to confirm my business entity?

If this is your first year filing taxes for your business, here are a few ways to identify how your business is set up:

  • Did you file a Form 2553 with the IRS to turn a C-corp or LLC into an S-corp? If so, your business is set up as an S-corp. 
  • Do you have a partnership agreement or operating agreement? If so, your business is set up as a Partnership.
  • If you run the business as an LLC and you're the sole owner, you have a Sole Proprietorship.
  • What did you select when you created your EIN? This will also tell you how the business is set up.

If this isn't the first time filing and the business setup hasn't changed, use last year's tax return:

  • Form 1040 with Schedule C is Sole Proprietorship.
  • Form 1120-S is S-corp.
  • Form 1065 is Partnership.

Related Information:

  • Is my business an SSTB?
  • Am I an employee or an independent contractor?
  • Am I considered self-employed?
  • What is a sole proprietorship?
  • Does a 1099-NEC or 1099-MISC mean I'm self-employed?

Was this helpful?

Found what you need?

Already have an account? Sign In

rating

  • Credit Karma

Dynamic Ads

IMAGES

  1. Best Legal Structure for a New Law Firm

    what is a legal structure in a business plan

  2. Types of Legal Business Structures Stock Illustration

    what is a legal structure in a business plan

  3. PPT

    what is a legal structure in a business plan

  4. Legal business structure #factsheet

    what is a legal structure in a business plan

  5. Choose a Legal Structure for Your Business 6

    what is a legal structure in a business plan

  6. Business Structure

    what is a legal structure in a business plan

VIDEO

  1. 6 Business Legal Structure Basics

  2. Lecture 2: Legal Structure of NPOs and Accounting Standard for NPOs ASNPO

  3. 3 Legal Considerations for Small Businesses

  4. EIN, Structure, Business đŸ‘©â€đŸ’Œ Business plan, Name, Bank 🏩 Account Let’s Talk Bout It

  5. Four business laws

  6. Stock buzz with Nikunj Dalmia

COMMENTS

  1. Guide to Choosing a Legal Structure for Your Business

    A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal...

  2. 5 Types of Business Structures Explained

    The simplest business structure is the sole proprietorship. If you don't create a separate legal entity, your business is a sole proprietorship. The main advantage of the sole proprietorship is that it's relatively simple and inexpensive.

  3. Write your business plan

    Executive summary Briefly tell your reader what your company is and why it will be successful. Include your mission statement, your product or service, and basic information about your company's leadership team, employees, and location. You should also include financial information and high-level growth plans if you plan to ask for financing.

  4. What is a Legal Structure? Definition and types

    A well-thought-out business plan serves as a guide for launching and managing your business and choosing its legal structure.When you go through the steps of how to write a business plan, you'll be able to see more clearly what legal structure you'll need for your endeavor.. Traditional business plans use a standard structure and offer details on each aspect of the business.

  5. Choose a business structure

    You should choose a business structure that gives you the right balance of legal protections and benefits. Content Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability.

  6. How to Choose the Best Legal Structure for your Business

    A sole proprietorship is the simplest type of business structure and the easiest to form and maintain. A sole proprietorship is basically a business that is you - and you are the business!

  7. Business Structure

    A business structure describes the legal structure of a company that influences the day-to-day operations of a business. A sole proprietorship and partnership are simple to set up since they are not required to meet ongoing requirements such as shareholder meetings and voting.

  8. Business Ownership Structures & Legal Implications

    Business Ownership Structures & Legal Implications. When forming a business, its legal structure is one of the owner's most important practical decisions. Each type of structure has its own benefits and considerations that are affected by the business' size, the number of owners and employees, the industry, and other variables.

  9. Small Business Legal Structures: LLC, Corporation, and More

    Every business is required to establish a legal structure, whether there's one employee or 10,000. A legal structure is a recognized category of organization from a legal perspective that influences how your business will operate regarding taxation, recordkeeping. Designating a legal structure for your company can also reduce the risk exposure of your personal assets.

  10. Determine the Legal Structure of Your Business

    Against popular belief, a legal structure not just decides the taxes you'll pay. It also decides the level of risks to your personal assets (your personal savings, car, house, etc.) and your business's ability to raise funds through loans and investments.

  11. Legal Form of Organization in Business Plan

    The legal form of organization in business plan is used to decide how the organization will function, how roles will be arranged and assigned, and how relationships will work. These organizational steps should take place at the beginning of the business formation. Starting a Business The first step when beginning a business is to name the business.

  12. Choosing a Legal Structure

    U.S. Constitution. View All State and Federal Codes. One of the most important choices you will make when forming your new business is which legal structure to choose from. Also called a business ownership structure or business form, choices include LLCs, partnerships, sole proprietorships, corporations, non-profits, and co-operatives.

  13. 4 Most Common Business Legal Structures

    4 Types of Legal Structures for Business: We've outlined the four most common business legal structures with considerations for each below, including tax, liability, and formation of each. Ready? 1. Sole Proprietorship

  14. Legal Structure of a Business

    Legal Structure of a Business The different business structures impact taxes, financing, and personal liability. See which legal structure suits your needs. One of the first decisions a new business owner makes is what type of legal structure the business will have.

  15. Writing a Business Plan

    A business legal structure is a very important component of a business plan. When beginning a business you must decide what legal structure your business will assume. The most common business structures are sole proprietorship, partnership, C Corporation, and S Corporation.

  16. How to write the structure and ownership section of my business plan?

    This section details the legal structure of your business and helps interested parties such as lenders and investors understand who they will be doing business with if they decide to go ahead and finance your company.

  17. Business Plan

    What is a Business Plan? A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing.

  18. Understanding the Legal Structure of a Company: How it Affects

    The legal structure of a company refers to its formal organization and classification under the law. It defines how the business is owned, operated, and regulated. This structure determines important aspects such as liability, taxation, decision-making authority, and ownership rights. One common type of legal structure is a sole proprietorship.

  19. How To Write A Business Plan (2024 Guide)

    The business plan should have a section that explains the services or products that you're offering. This is the part where you can also describe how they fit in the current market or are ...

  20. Legal Structure of a Business

    The legal business structure is something you need to decide at the outset, although you can change it later on if required. All business structures have advantages and disadvantages, depending on factors such as the size of your business, the nature of your business and your future plans for the business.

  21. Legal Structure of a Business

    Legal Structure of a Business Plan. A business's legal structure is a key component in any business plan. Before you can build or start your new business, you'll need to determine what legal structure will best suit your fledgling enterprise. In certain cases your choice of a business legal structure will determine which income tax forms ...

  22. Legal Structure Of A Business Plan Example

    Corporation A corporation is a legal entity that is separate and distinct from its owners. This means that the corporation can own property, sue and be sued, and enter into contracts. The primary benefit of a corporation is that it offers liability protection to its owners.

  23. Small Business Finance: Understanding Legal Structure and Tax

    The GmbH is its own legal entity and owns everything that is collected through it, highlighting the importance of understanding the legal structure of a company. 📝 Creating a balance sheet with a profit and loss statement is necessary to calculate the tax owed, emphasizing the importance of financial documentation for small business owners ...

  24. How to Start a Small Business at Home in 2024

    A business plan outlines the direction of the business — its goals, strategies, structure, ways of measuring success and plans for dealing with things like change and risk. Simply put, it's ...

  25. What type of entity is my business?

    The type of tax return that your business is required to file will depend on the legal structure of your business entity. Different business structures have different tax implications and reporting requirements. Here's a breakdown of the common business entity types and the corresponding tax returns they typically need to file: Partnership (1065)

  26. Tips to help you start a business in 2024

    Legal essentials for business; Get help for your business; Starting a business checklist ... It's important to know, you can change your business structure as your business grows or expands. Choose a business name; Choosing your business name ... you need to check if it's available and make sure it stands out against your competitors. Develop ...

  27. A Step-By-Step Guide to Structuring A Digital Marketing Plan

    At its core, a digital marketing plan is your master strategy for winning over potential customers online. It's about setting clear goals, keeping tabs on your progress, and hitting deadlines that align with those objectives. The plan outlines how to engage the audience with a message that will influence their choice.

  28. Why a Small Business Cybersecurity Plan Should Be a Priority

    2. Pick a legal business structure. Every business has a business structure. For example, some are sole proprietorships, partnerships, Limited Liability Companies (LLC) and Corporations. If you never formally apply for a business structure with the state, then your business is a sole proprietor (single owner) or general partnership (multiple ...