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How to Choose the Best Legal Structure for Your Business

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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.

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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

Types of Business Structures Explained

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.

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• 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

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.

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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. Each state passes its own business formation laws, and not all states allow for every type of business structure. This means that the requirements for forming a particular type of business vary from state to state.

Sole Proprietorships

A sole proprietorship is the simplest kind of business. Most sole proprietorships are small businesses that have one employee — the owner. Forming a sole proprietorship is usually easy. In fact, in many states it requires no special action. Doing freelance or independent work under your own name is usually enough to form a sole proprietorship.

Two major benefits of structuring your business as a sole proprietorship are simplicity of formation and taxes. Since there usually are no formal steps required to form a sole proprietorship, there is no cost involved. Also, owners of sole proprietorships count the business’ income on their personal income tax returns. One drawback is that sole proprietorships do not offer any legal protection to their owners.

Partnerships

When two or more people start a business together, they can form a partnership. There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. In addition, joint ventures have some aspects of partnerships. The amount of money contributed, control exerted over the business, and legal liability vary depending on which type of partnership is formed.

To form a partnership, most states require partners to register the business with the secretary of state. It is also important for the partners to formalize their relationship in a partnership agreement, which is a contract that addresses the major aspects of the business, including how it will be run, how profits are split, and what to do in the case of dissolution.

Consulting a lawyer experienced in business formation will give a business owner or potential owner a better understanding of each business structure in the context of their unique business situation. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.

Corporations

There are generally two types of corporations: C corporations and S corporations. Larger businesses with multiple employees are often structured as C corporations, whereas many smaller businesses choose to organize as S corporations. The primary difference between an S and C corporation is how taxes are paid. C corporations are taxed as independent entities. The income of an S corporation “passes through” to the individual tax returns of its owners. An LLC may choose to treat itself as an S corporation for tax purposes.

Non-Profit Organizations

The basic definition of a non-profit organization is a business that does not pass on excess revenue to owners, shareholders, or other investors. Instead, a non-profit uses this money to further its mission, which includes paying the salary of its owners and other employees.

Many non-profit organizations choose to incorporate to obtain federal and state tax exemptions, grants, and other benefits. One of the most common types of non-profit organizations is a 501(c)(3), named after a section of the IRS code, but there are other types.

Discover answers to frequently asked questions about business operations and formation.

Franchises are not a traditional business structure like the ones described above. A franchise is a business that licenses the name, logo, trade secrets, or other aspects of an existing business. For example, most fast food restaurants are franchises. In many cases, a person starting a franchise forms an LLC, partnership, or S corporation, and that company becomes the entity that pays the larger company for the right to use the name.

Last reviewed October 2023

Small Business Legal Center Contents   

• Small Business Legal Center
• First Steps in Starting a Business & Legal Formation
• Sole Proprietorships Under the Law
• General Partnerships Under the Law
• Limited Partnerships Under the Law
• Limited Liability Partnerships (LLPs) Under the Law
• Limited Liability Companies (LLCs) Under the Law
• Non-Profit Corporations Under the Law
• Franchises Under the Law
• Cooperatives Under the Law
• Benefit Corporations & Hybrid Entities Under the Law
• C Corporations Under the Law
• Close Corporations Under the Law
• Joint Ventures Under the Law
• S Corporations Under the Law
• Hiring and Managing Employees & Relevant Legal Considerations
• Business Management, Growth, and Related Legal Concerns
• Business Disputes & Related Lawsuits
• Social Media Influencer Marketing & Related Legal Issues
• Making a Business Contract
• Commercial Real Estate & the Law
• Small Business Law FAQs
• Find a Business Law Lawyer

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How to Choose a Legal Structure for Your Business

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Understanding how different business structures work and how they impact the growth of a business tends to be challenging since every business is different. This fact can make it hard to choose a legal business structure for your new venture. 

If you’re starting a business , it’s imperative to understand the various options in front of you and choose the right one from the get-go.

In this article, we’ll observe the main factors that influence how you choose your business structure, while also looking at the pros and cons of each option. This way, you can make an informed decision for your new business. 

What Is a Legal Structure for Your Business?

A registered business entity, or a business legal structure, is known as a government classification, which controls certain aspects of a business. It’s essentially the type of business you run in the eyes of the government. These types include LLCs (Limited Liability Companies), Partnerships, S-Corporations, and Sole Proprietorships, to name a few.

Your legal business structure influences your tax burden on a federal and state level. It also regulates how much liability a business faces in case of a lawsuit.

Moreover, your business structure determines if you need a board of directors and how often you should file paperwork. Depending on what structure you choose to register your business as, it either ensures that there’s no barrier between your business and personal taxes, or that there’s a strong one. 

Factors to Consider When You Choose a Business Structure

It can be hard for new entrepreneurs to choose a business structure. When trying to choose one, think about your financial needs, the ability of your business to grow, and the potential risks that might come with it. 

A business structure is not set in stone. You can always change it later. However, switching the legal business structure once you have registered your business is a complex process. Therefore, it’s recommended to thoroughly analyze your options before picking one.

Here are the factors you need to keep in mind when you choose a legal business structure. 

1. Flexibility of Your Business Plan

Return to your business plan and review all of your goals to see which business structure will be more suitable for you. The ideal business structure will align with all of your objectives. The business entity you pick should allow plenty of room for growth. 

In this case, an LLC offers the most flexibility when it comes to high growth potential. Plus, there’s lower risk and limited liability. 

2. Operational Complexity

Each type of legal business structure comes with its own costs and setup procedures, which also include complexities. Therefore, it’s recommended that new entrepreneurs pick a business entity that can easily be set up, comes with minimum legal formalities, and doesn’t cost a fortune. 

In this case, a sole proprietorship tends to be more straightforward as compared to other structures. However, it might be a bit hard to finance your business with external funding. 

3. The Level of Liability

When you choose a business structure, think about the extent you want your liabilities and assets to be protected. Certain structures offer limited liability protection that keeps the business owners’ assets safe in case the business goes through a loss or bankruptcy.

Alternatively, unlimited liability businesses offer full responsibility to the owner when it comes to legal issues or debts. New entrepreneurs need to take this critical factor into account as it’s going to affect their involvement in potential liability.

In this case, a corporation comes with the least personal liability due to being its own entity, while an LLC comes with the same protection but offers tax benefits similar to a sole proprietorship. In a partnership, the liabilities are shared between the different partners based on their agreement.

Your chosen business structure will also determine your tax obligations. This is because each entity is treated differently when it comes to taxation. Generally, sole proprietors get taxed on a personal level since the business and the owner is seen as one legal entity.

In the case of other entities like a corporation or an LLC, business owners are required to pay personal tax, corporate tax, or other specialty taxes that are charged by the government.

According to experts, you should avoid double taxation during the early stages of your business. An LLC structure can help with that by ensuring that you only get taxed as an individual and not as a company. Also, it helps to use a payroll service to help clarify taxation issues and payroll complexities. 

5. Responsibility and Control

Make sure you choose a business structure where you can handle a certain level of responsibility and control. For instance, when you’re the sole owner of a company, you have much more control as compared to being in a partnership or as a shareholder.

On the other hand, the more control you have, the more responsibilities you will have to take care of. In other business structures, such as a partnership, both the control and the responsibilities are divided between two or multiple people.

If you are willing to take on full responsibilities in addition to full control, then an LLC or a sole proprietorship business structure is the ideal choice. In the case of a corporation, there is a board of directors responsible for making important business-related decisions. 

Initially, a single person can handle a corporation, but as the business grows, the need for more people to take on certain responsibilities will grow as well.

6. Capital Investment

As a new business owner, you might need external funding of some sort to meet the costs of starting a business . In this case, corporations are more than likely to receive outside funding as compared to other business structures, like a sole proprietorship. 

A corporation can also sell its shares of stock in order to obtain extra funding for growth, but a sole proprietor can only get funds through personal credit, personal bank accounts, or by getting a partner. An LLC business goes through similar struggles, but the business owner does not necessarily have to use their personal assets or credit.

7. Business Permits and Licenses

You will require certain permits and licenses to operate once you register your business. Based on how you choose a business structure, you might need licenses on federal and state levels, in addition to the local level.

Each state has its own legal requirements for starting a business , and this includes business licenses . Most of the time, businesses aren’t aware of the licenses that are applicable to them. Take into account your business industry and the state you chose to launch your business in.

Types of Business Structure

Here’s a list of all the types of business structures with their pros and cons. This will help you choose a business structure that’s ideal for you. 

1. Sole Proprietorship

This is the most straightforward and simplest business structure. In a sole proprietorship, the owner has full rights to their business, including all responsibilities. 

• Offers complete control
• Does not have a lot of administrative work
• Offers low cost
• Offers tax deduction
• Comes with increased liability risks
• Hard to get outside funding

2. Partnership

This is an unincorporated business that’s owned by two or more owners. A partnership consists of people or other businesses. All profits get divided among the different owners while getting reported on each of their tax returns.   

• Comes with easy tax treatment
• Offers capital in the early stage
• Offers ease of operation
• There’s more expertise and knowledge 
• More attorney costs
• Arguments among partners
• Liabilities of different partners 

3. Limited Liability Company (LLC)

This is a hybrid business structure. Similar to a corporation, the owners’ or members’ personal liability is limited, but the profits can be taxed on a corporate level or a member level.

Here’s how to start an LLC .

• Comes with limited personal liability
• Has a favorable tax regime
• Offers improved credibility
• Increased paperwork and maintenance
• Offers limited options for investment
• There are costs for renewal

4. Corporation

This is a legal business structure that’s fully independent and it’s separated from the owners. There are several types of corporations in the US, where C-corps and S-corps are the most popular ones. Other corporation types include B-corps, nonprofit corporations, and close corporations.

• Offers limited liability
• There’s business continuity 
• Comes with secured business finance
• It can be costly to set up
• Risk of double taxation
• Comes with numerous obligations

5. Cooperative

Essentially, this is an employee-owned business, where each member has equal rights. It doesn’t matter how many shares each member owns, earnings and profits are equally divided among everyone.

• Employees are more invested
• There’s reduced liability
• More funding opportunities
• Comes with a lower overhead
• More tax advantages
• Not a profitable option for founders
• There are certain funding challenges
• Comes with legal restrictions

What Business Structure Is Best for Me?

So, what do you do when the time comes to choose a business structure? You take into account everything related to your business before making the final decision. For instance, if your business is based on a hobby such as video production, photography, blogging, and so on, then a sole proprietorship is the ideal business structure for you. 

However, if your business has the potential for growth and comes with a massive customer base, then a corporation or LLC will suit you better. These two business structures offer the most protection and a reduced risk of personal loss.

How to Choose a Business Structure – Conclusion

There’s no one-size-fits-all when it comes to business structures. Every business entity has its own unique elements and knowing how to properly utilize these elements is how you will have a successful business.

The ideal structure depends on the current condition of your business, and also where you want your business to be in the future. Therefore, choose a business structure according to your needs.

Read our article on avoiding common mistakes when you’re starting a new business.

About the author

Dr. Gabriel O'Neill, Esq.

Dr. Gabriel O'Neill, Esq., a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. O'Neill guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.

As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Gabriel O'Neill, Esq., is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.

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Determine the Legal Structure of Your Business

Free Small Business Partnership Contract Template

Radhika Agarwal

• December 13, 2023

13 Min Read

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?

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.

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.

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.

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.

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.

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.

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.

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.

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About the Author

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.

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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.

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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

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• 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.

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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.

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

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.

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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.

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.

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.

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 £1.5k ($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!

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.

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• Alex Kleyman
• Oct 6, 2021

Everything You Need to Know About Business Legal Structure

Speaking of legal matters for businesses. There are a number of things business entities and their legal consultant have to consider while appearing in a court of law or getting involved in a legal matter. Businesses all around the world have to face legal jurisdictions. The structure of a business refers to the legal structure of an organization. This structure is recognized in any specific jurisdiction. However, a lot of business owners don’t know the complexities of business legal structure and the legal issues connected with it. Therefore, having the legal support of a boutique law firm NYC based or elsewhere like Kleyman Law Group is essential to deal with the legal matters involving various types of business structures .

We have put together some valuable details to help you understand the ins and outs of business legal structure and other things that you should know. Further details are given below, so read on to grasp the concept of the legal structure of a business or organization completely.

What is Business Legal Structure?

Here, we will try to elaborate on the business legal structure as much as possible to help you fully understand it. So, the business structure of an organization refers to its legal structure that is understood and recognized in any given jurisdiction. This business structure holds a pivotal role in determining the day-to-day operations of any business entity. It is also a key factor in determining the actions an organization is allowed to undertake. For instance, responsibility for the obligations of the business, raising capital, and the amount of taxes that a specific organization is bound to pay to the tax enforcement agencies.

Legal structures of business are a complicated matter, therefore, business owners should analyze and consider the requirements and objectives of their business in the first place. Moreover, they should know the basics and characteristics of every single business structure. Business litigation attorneys with substantial experience and expertise like the ones in Kleyman Law Group , New York City can help business owners understand the entire legal structure of a business example based to guide them in making the right choice regarding the legal structure for the business .

Types of Business Structure:

The 4 types of legal structures for business includes:.

Take The four most common types of business structure found widely in the United States are sole proprietorship, partnership, corporation, and Limited Liability Company. We will discuss all these types and their further forms briefly in this section. Read on to know more details.

1. Sole Proprietorship:

Take it as an unincorporated company that is owned and managed by a single individual only. It is considered the simplest type of business, however, the downside of the sole proprietorship is it offers the least amount of protection for the owner in terms of finance and legal matters. A sole proprietorship doesn’t form a separate legal identity like partnerships or corporations. Typically, the owner of that business shares the same identity as the company. This essentially means the owner is fully liable for all types of liabilities incurred by the company, with a business structure that is referred to as the sole proprietorship.

2. Partnership:

As the name suggests, a business with a legal structure of a partnership is owned by two or more people. These people are generally termed as partners. Some types of partnerships are discussed below:

General Partnership

The most basic type, a general partnership. No state involvement. This is one simple type that requires a simple paper signing to conclude a partnership agreement. This agreement states several things including the splitting of profits and ownership and other different terms as per the business type and scenarios.

The owners or partners have full authority. They have free will, they do not need any approval for things like contracts and loans. All the partners (one or more) have total liability and mutual responsibility.

Limited Partnership

As the name suggests, limited partnerships or in short LPs are agreements formed authorized by the state. In this agreement, a business has a general partner that manages affairs of the business and limited partners that do not actively take part in business management but rather invest in to keep the company running.

The limited partner’s role is clear, they only invest and take part in the profit, and they are not responsible for any sort of debts and company-related issues. Such partners have their share in profit and cannot lose money more than they have invested. In cases, where the silent partner chooses to manage the business by himself, they are no longer considered as limited partners and loses their protections and perks as well.

For instance, if you are running a business with two or more partners where you have taken a loan for business nourishment and due to reasons, the business is unable to pay back, in such cases, your legal assets are used as compensation and to pay back the debt. If you need some entity to help you form or dissolve the general partnership, Kleyman Law Group , New York can help.

Limited Liability Partnership

Limited liability partnership or LLP is similar to the general partnership as per the operations are in concerts. In this agreement, every partner is active and manages the business affairs.

The difference is that it sets some limits and no one is liable for one another’s actions. The contracts, debts, and collective agreements in the business are the responsibility of everyone but individual errors are bounded, and the person commits any omission, he/she will be solely responsible for it. Such agreements are complicated and require a professional Law group involvement. For the best handling of such agreements, Kleyman Law Group , New York can help.

3. Limited Liability Company

Otherwise, known as LLC is one of the most flexible business types. LLC is a form of business that enjoys the advantages of both partnerships and corporations. Business entities with the legal structure of LLC retain the tax of sole proprietorships and the limited liability of a corporation. Moreover, such business entities are free to choose various tax treatments.

4. Corporation:

Now coming to the corporations, simply put, a corporation is a separate legal entity formed by its various shareholders. Incorporating a business helps owners stay away from personal liabilities because of the debts of the company or any legal disputes it is involved in. It is quite complicated to create a corporation if we compare it with the other 3 types of businesses. The drafting of incorporation articles is a must. These articles include data like the number of shares to be issued, the specific name and location of the business, and its objective. Here are some of the main types of corporations:

C Corporation:

This is the most common form of incorporation. In this form of legal structure, the corporation is taxed as a business entity, and owners are bound to receive profits, which are then separately taxed on an individual basis.

S Corporation:

This is quite similar to a business entity with the business structure of a C corporation, however, it may only consist of around 100 shareholders at max. Another difference between C Corporation and S corporation is the S corporation is taken as a pass-through entity like the partnership, which means the profits will not be taxed twice.

Non-Profit Corporation:

As a legal business structure, this is generally used by charitable organizations. Such corporations enjoy tax exemptions. However, in order to keep it free of tax, all forms of incoming cash flow should be spent on the future plans or the operations of the organization.

Can I Get the Legal Structure of a Business Example?

Now that we have briefly described all the legal structures for business, it is time to discuss some businesses that fit the examples of a sole proprietorship, LLC, partnership, and Corporation. We will discuss these examples briefly here. When we talk about the legal structure of a business example, the very first type of business that comes into our mind is the sole proprietorship, the prime example of this legal structure is the popular eCommerce store eBay. This eCommerce store eventually turned into a corporation. Thinking about the partnership, the famous computer brand Hewlett-Packard or in short HP as its name suggest is an example of a successful partnership. When it comes to LLC, a great example of LLC is Chrysler, which is one of the largest automobile manufacturers in the United States. Chrysler has maintained its business structure as LLC since its inception. Lastly, Apple the famous technology giant is known as Apple Inc., because it is listed on the stock exchange like other large companies. It is still existing even when one of its co-founders and ace of technology, Mr. Steve Jobs, has demised.

How to Choose a Business Structure:

Choosing the Right Business Structure: While making the legal structure of a business plan , it is necessary for business owners to know the pros and cons, ins and outs of every single type of business structure. There is no way you start a business without giving the legal structure of your business thought. Once you consider all these structures in detail, you will end up knowing plenty of things about each type that may act to your advantage or disadvantage at times. This is because opting for the right business structure for your business will influence the legal and operational risks, tax obligations, legal costs, clientele, and obviously the asset protection.

Starting from the sole proprietorship, for entrepreneurs, it is a good structure that offers them complete control of their business. Moreover, it is an easier and inexpensive process when it comes to establishing a sole proprietorship. Additionally, the business owners can also get tax benefits, as the income is considered as the personal income of the owner of the company. Therefore, it is only taxed once. Lastly, the number of regulations for sole proprietorships is relatively smaller. However, the only shortcoming of a sole proprietorship is it offers very little protection to the owner in terms of legal matters and finance from various liabilities.

Now coming to the partnership structure of the business, it offers more flexibility, however, it also comes with greater exposure to risk as well. LLCs on the other hand, take advantage of the limited liability status. In LLC, the company has its own legal entity, which protects the owners from personal liability for the operations and debt. Additionally, LLCs get to choose between various tax treatments and are capable of retaining their flow-through taxation status as long as it is not identified as a C corporation tax entity.

Finally, in the case of corporations, there is no risk of the business being dissolved in case of the demise of one of the business owners like sole proprietorship and partnership. Take the example of Apple Inc. it still exists even after the demise of Steve Jobs, who was one of the co-founders of Apple. This is because corporations exist as legally separate entities.

Need advice about business structures? Call Kleyman Law Group (Brooklyn, NY Commercial & Business Litigation Attorneys) Today!

If you are looking to set up your own business and want legal advice from experienced and certified commercial litigation attorneys with expertise in business development, formation, management, and modifications, then stop browsing the internet with the key phrase “ small business attorney near me ” . We are here to help you regarding the selection of the right legal structure of a business plan. We offer professional business development and Business litigation services at Kleyman Law Group, NYC . We will also help you draft the organizational documents that play a key role in determining the overall business structure of an organization. If you need any kind of legal advice or help from business litigation attorneys , then Call Kleyman Law Group (Brooklyn, NY Commercial & Business Litigation Attorneys ) Today!

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.

A corporation and a limited liability company provide limited liability protection to their owners, which serves to prevent the owner’s personal assets from being sold off to settle the entity’s debts and liabilities.

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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. 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.

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Legal product reviews and business guidance from industry experts.

19 Mar 2020

How to Write Your Law Firm Business Plan

By Cari Twitchell

News Articles Healthy Strategy

Every new law practice needs a business plan . This is a guide to creating one.

Here is what should go in your business plan once you’ve decided about your law firm business model.

Section One: Executive Summary

This section provides a succinct overview of your full plan. It should also include the following:

• Mission statement.  This statement should be one or two sentences at most, so you can quickly state it off the top of your head at any given moment. It should clearly state your value and offer inspiration and guidance, while being plausible and specific enough to ensure relevancy. For further direction on how to write a mission statement, read this Entrepreneur article .
• Core values.  Your core values outline the strategy that underpins your business. When written well, they help potential employees and clients understand what drives you every day. When written incorrectly, they include meaningless platitudes that become yet another thing forgotten or ignored during practice. To pack the most punch into your core values, write them as actionable statements that you can follow. And keep them to a minimum: two to four should do just fine. You can read more about writing core values at  Kinesis .
• What sets you apart.  If you are like every other attorney out there, how will you stand out? This is known as your unique selling proposition (USP). What is it that will convince clients to turn to you instead of your competition? By clearly stating your USP, you identify what it is about your firm that will ensure your success.

Are you feeling slightly overwhelmed by all of this? Then write this section last, as you’ll find much of what you write here is a summary of everything you include in subsequent sections.

Section Two: Company Description

Write a succinct overview of your company. Here is what it should cover:

• Mission statement and values.  Reiterate your mission statement and core values here.
• Geographic location and areas served.  Identify where your offices are located and the geographic areas that you serve.
• Legal structure and ownership. State whether you are an LLC, S-Corp or other legal entity. If you are something other than a sole proprietor, identify the ownership structure of your firm. How does your law firm business model influence the ownership type?
• Firm history.  If you are writing or updating a plan for a law firm already in existence, write a brief history that summarizes firm highlights and achievements.

This section is often the shortest. Do not spend much time or space here. Touch on the major points and move on.

Section Three: Market Analysis

Done correctly, a well thought out market analysis will help you identify exactly what your potential clients are looking for and how much you should charge for your services. It also enables you to identify your competitors’ weaknesses, which in turn helps you best frame your services in a way that attracts your preferred clientele. You probably already considered some of these subjects when deciding on the small law firm business model, but you need to document them.

Elements of a market analysis include:

• Industry description.  Draft up a summary that encompasses where your particular legal niche is today, where it has been, and which trends will likely affect it in the future. Identify everything from actual market size to project market growth.
• Target audience.  Define your target audience by building your ideal client persona. Use demographics such as location, age, family status, occupation and more. Map out the motivations behind their seeking your services and then how it is you are best able to satisfy their requirements.
• Competitive analysis.  This is where you dive into details about your competitors. What do they do well? Where do they fall short? How are they currently underserving your target market? What challenges do you face by entering legal practice in your field of choice?
• Projections.  Provide specific data on how much your target audience has to spend. Then narrow that down to identify how much you can charge per service.

A proper market analysis includes actual data to support your analysis. If you are unsure of where to find data, Bplans  has a great list of resources for you to use. And if you would like to read further about conducting a market analysis, check out this article from the Small Business Administration.

Section Four: Organization & Management

This section goes into detail about you and any others who may have ownership interest in the firm. The small law firm business model section here should incorporated into the management documentation. Do not be afraid to brag a bit!

• What is your educational background?
• What experience do you currently have?
• Why are you the right person to run your firm?

If there are other individuals involved, it is a good idea to insert your organizational chart here. Visuals help quickly convey information and break up otherwise blocky text.

Section Five: Services

The Services section is the heart of your law firm business model plan. It is where you dive into all aspects of your services, including:

• The problem(s) you are addressing.  What pain points do your preferred clients experience? What can they do right now to alleviate those pain points? Answer these questions, and then take the extra step to explain how those current solutions fail to adequately address their problems.
• The solution(s) you are providing.  This describes how your solutions better resolve your prospective market’s needs. This not only includes the actual work you do, but the benefits that each client will receive based on your work.
• An overview of your competition.  Describe your competition here. For instance, which other solo attorneys and firms provide the same solutions as you? What are your advantages over these competitors? What do you differently when providing your solutions? How will clients gain additional benefits by seeking out your services instead of working with your competitors?

Section 6: Marketing Strategy

Your marketing strategy section needs to address the three P’s:

• Positioning.  How will you position your law firm and your services? What will you say to present your practice in the best light? What short statements can you use to entice a potential client to pursue your services?
• Pricing.  How much will you charge? How does that fit within the legal industry? Within your niche industry? What do clients receive for that price?
• Promotion.  Which sales channels and marketing activities will you pursue to promote your practice? Who is in charge of these activities? Even if you plan to build your law firm on the basis of word-of-mouth referrals, you must remember that most referrals will still look for information about you before contacting you. Know where they will look and ensure you are there.

Section Seven: Financials

Last comes the financials section. It is the key component to your plan if you are going to seek funding to get your practice off the ground. It is imperative that you complete this section even if you are not seeking funding, however, as you need to paint a clear financial picture before opening your doors.

Two main items make up this section: budgeting and forecasting (sales and cash flow). Answer these questions to help you address these items:

• How much starting capital do you need?
• How much money will it cost to keep your practice operating on a month-to-month basis?
• How many cases will you need to close each month to break even?
• How many cases would you need to close to make a profit?
• What is your projected profit and loss for the year?

This section often incorporates graphs and other images, including profit-and-loss and cash-flow tables. The more specific you get with your numbers, the more likely you are to succeed!

One final note: If your goal is to submit your business plan to potential funders, you want to do everything you can to make sure your plan stands out. One good way to do this is to work with a designer to artfully format your plan. Great presentation can take you a long way.

Originally published 2017-09-23. Republished 2020-07-31.

Cari Twitchell

About the Author

@CariTwitchell

/in/caritwitchell/

Website: https://www.customcontentllc.com

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How to Draft a Law Firm Business Plan

Law firms are something more than a business. Law firms and the lawyers within them are engaged in a profession, with obligations that go beyond purely commercial concerns.

Listen to this article:   Click here to play this audio clip

This truth can obscure the need for lawyers to pay attention to the business management side of their practices: their finances, marketing plans, business development efforts, IT purchases, lease terms and capital needs. For the highly trained lawyer, such concerns may feel at best like an afterthought, or at worst a nuisance that steals time from their true occupation: the “practice of law.”

And yet, those annoying business details are responsible for keeping the lights on. While law firms may be more than a business, there is, in fact, a large and necessary business element to them. For solo practices and small firms in particular, investing time into the business management side of legal practice can make a major difference in the financial rewards they derive from it—or even their survival. Firms that have failed to do so in the past (and even those that haven’t) can get a handle on their law practice business management by taking the step of drafting a business plan.

THE POINT OF A BUSINESS PLAN

We’ll discuss the components of a business plan in a moment, but first, let’s talk about why this exercise is valuable. For another type of business, a business plan may be useful in attracting investors or securing financing. Law firms should not think of their business plans as utilitarian documents in that sense (although someday one could prove helpful in obtaining a line of credit, say, or attracting lateral partners). Instead, the primary value of the business plan, particularly for the solo practice or small firm drafting one for the first time, lies in the fact that it forces the firm to think about business issues that it otherwise would not have considered.

As the D.C. Bar says in its advice to startup law offices : “The act of planning helps you think things through thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later.”

Of course, a business plan does little for anyone if it is quickly forgotten. But the mere act of generating a business plan gives a firm a direction to head in and goals to point toward. If the firm makes it a practice to revisit the business plan on an annual basis (if not more regularly), its business considerations will stay top-of-mind and the firm will continually refine them in ways that improve its performance.

THE CONTENTS OF A BUSINESS PLAN

Creating a strong business plan will require an investment of time and energy. At the same time, no one wants to write, or read, a massive document. To improve the chances that the project gets done, and gets read, it is best to keep a business plan to a reasonable length. Anything over 20 pages may stretch attention spans to the breaking point, and there’s no harm in going shorter if you have covered all the territory you need to by that point.

So, what, exactly, is the territory that you should cover? Most authorities agree that a sound business plan for a law firm should address the following broad areas:

• Overview of the Firm

This section should include basic information about the firm: its name, legal structure, practice areas and leadership positions. It should also contain some deeper information about the firm's identity and aspirations.

This would include:

A mission statement about the firm’s purpose

A vision statement or recitation of medium- and long-term goals for the firm

Important aspects of the firm’s history

Any important philosophies that the firm brings to legal practice

• Market Analysis

This section should discuss the business trends affecting the firm’s important practice areas and clients. It should evaluate any technologies that are affecting your practice area and consider how the firm may leverage or keep up with them. This section should also devote substantial energy to identifying the firm’s major competitors in each of its important practice areas and comparing their services to the firm’s.

In this section, identify the firm’s major clients, breaking them down by important characteristics like size, location, industry and practice groups used. Go through a similar exercise for major client prospects and targets. It’s worth examining how the firm can improve its relationships with both of these groups.

Important financial information includes the firm’s fixed and variable costs, backward- and forward-looking revenue, realization rate, collection rate, monthly overhead, assets and liabilities. A 12-month profit and loss projection should be included and could be considered the heart of the business plan.

There is a great amount of detail that any firm could get into on this front. Don’t get overwhelmed by it; at the same time, this is some of the most important information in the business plan, so it’s not advisable to gloss over it.

This section will address key operational issues like the office lease, equipment purchases and technology plans. You may assign roles to various staff members for operational issues.

Think about what marketing the firm currently performs, how it obtains clients and what marketing goals it wants to set for the future.

After completing these and any other sections the firm might want to address, then go back and draft an executive summary to be included at the beginning of the business plan document. The summary should be professional, but don’t be afraid to give it some optimistic energy. After all, with your eyes on the business management fundamentals of your firm, things should be looking up for the future.

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How to start a business | 10-step guide

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There has never been a better time to start a business. In our hyper-connected digital age, you can set up a website , online store and entire brand from anywhere in the world.

Online business-building tools have never been more accessible.

And with the right approach, you can grow a loyal customer base quicker than you might think.

If you’re wondering how to start a business this year, we’re here to help. In this guide, we’ll look at the essential steps you need to take to make your business real.

Ready? Great. Let’s get started. 

Note: The information in this article is provided for general informational purposes only and should not be construed as professional advice on any subject matter. You should consult with a legal and/or financial advisor before making business decisions.

1. Find a business idea

First of all, to enjoy sustainable commercial success, you have to find a business idea that is not only feasible but something you feel passionate about. 

If you have a short list of business ideas in mind, dig a little deeper by carrying out a little market research. Look at brands in your potential niche and find out how their consumers engage with them while looking at overall demand based on public sales or growth data.

This will give you inspiration for your own business ideas.

Armed with your market and competitor research, you can develop your ideas by considering:

• What am I passionate about?  
• What are my specific skills and expertise?
• Can I feasibly sell or promote the product or services in my potential niche?  
• What unique spin can I put on well-trodden business ideas or concepts to stand out?  
• What gaps or weaknesses can I exploit in my potential niche or market?  

Ask yourself these questions and you’ll eventually land on a business idea that has the potential to grow while keeping you engaged and inspired in the long term.

Related: 37 of the best side business idea s

2. Use market research to validate your idea 

Once you’ve landed on a business idea, you’ll need to see if it has any legs. We just touched on the concept of market research, but now we’re going to drill down a little deeper.

When brainstorming business ideas, you will have scratched the surface. But, to really validate your concept, you must get under the skin of your industry as well as your target audience.

In addition to gathering industry data, you should build buyer personas .

Here are some market research and analysis ideas for your consideration:

• Conduct consumer surveys across channels (phone, email, social media, mobile app, etc.). 
• Hold focus groups to gain a deeper understanding of how your likely buyers might perceive your brand and what you have to offer.
• Observe how your target audience engages with your competitors on social media as well as the topics they’re discussing online.
• Explore public data related to your target market to uncover consumer buying patterns as well as sales trends.

This will help you validate your idea while giving your business planning a definitive direction — which brings us onto our next point.

Related: How to get started with travel blogging

3. Create a business plan

Now your idea is validated and you’ve got a handle on your most likely buyers, you’ll need to start planning.

If this is your first attempt at learning how to start a business, methodical planning is key. Here are some tips to help you navigate the process like a boss:

• Consider your “why.” This will help you gain an understanding of your key motivations for starting your business as well as what you hope to achieve
• Outline plans of action or initiatives that represent your brand mission
• Define your key business goals using timelines and milestones to keep you on track 
• Write an executive summary that states all essential information related to your business’s aims, goals and products

To break down each step in more detail, read our essential post on 5 things to include in a business plan . You can also download a nifty free business plan template from the Prince’s Trust website. 

4. Explore funding options

To get your business off to a flying start, you’re going to need funding. The options you explore will depend on the type of business you’re looking to start.

Many choose to start the business on the side of a full-time job.

72% of small business owners surveyed by GoDaddy in 2023 payed ₤1,000 or less in set-up costs.

If you’re looking to start a solely online business, you could do this or use your personal savings to get up and running.

Other business funding options include: 

• Crowdfunding: Using dedicated crowdfunding platforms, you can inspire people to donate to your business venture in return for incentives or equity. This can be a very effective form of fundraising—and there have been many crowdfunding success stories in the UK over the years.
• Gain a line of credit: Akin to obtaining a personal line of credit, you can gain a line of business credit. The terms, limits and interest rates will depend on the nature of your business as well as your financial history and credit rating.
• Get a grant: Another way of securing funding for your business is getting a grant. If your business mission is rooted in building a better community or inspiring innovation, you could be eligible for a grant from the Government . Unlike loans, grants do not have to be repaid.
• Pitch to investors: Researching investors in your niche and pitching to them is an excellent way to get funding as well as professional backing and expertise. This is certainly an avenue worth exploring if you’re looking for startup capital and willing to trade this for a portion of your future profits.

Interested in learning how to start a business with little or no funding? Read our to-the-point guide on how you can start a business in the UK with no money .

5. Choose a legal business structure 

A key step in starting a business is choosing a legal structure. Before you officially register your business, you have to decide on a concrete business structure—and the type you choose will impact your business from a legal standpoint. So, take your time when considering these structures.

Sole proprietorship 

If you own your business independently, you can opt for sole proprietorship. This will give you complete control on your decisions.

But it’s worth noting that if your business struggles or fails to achieve profit, you will be solely responsible for paying back any debt.

Pros:  

• You will be in full charge of business decisions, development and planning 
• You will receive all of the business’s profits 
• You will find filing for tax simpler 

Cons:  

• Managing everything on your own could burn you out and limit your potential for growth 
• If you hit financial hot water, you will be liable for settling any debts or arrears 

Partnership

Combining forces with another budding business owner will give you double the startup as well as another person who is liable for the red tape as well as the financial aspects of the business. More often than not, two heads are better than one—forge the right partnership and you could see your business thrive from the get-go. 

• You will have twice the skills, perspective, and financial scope 
• You will have another person who is responsible for the running as well as financial and legal aspects of the business 
• If you and your partner disagree on any aspect, this could cause the kind of friction that could derail progress and stunt growth 

Corporation 

Setting up a business as a corporation separates your personal assets from your business assets.

If your company incurs debt or is subject to legal disputes, in most cases your personal assets will be protected.

There are many different forms of a corporation to consider, some of which offer access to some pretty decent investment opportunities.

• You will gain access to more funding options
• You will benefit from certain tax breaks 
• You will be able to protect your personal assets from business risks
• Corporates can be costly to form and run 
• There can be a lot of red tape involved in the running of a corporation 

Limited liability company (LLC) 

As a limited liability company (LLC), your business will have the legal protection of a corporation while also reaping the tax rewards of a business partnership.

• The setup process is relativity straightforward 
• You will gain access to a range of capital and funding options
• Your personal finances will be protected from risk
• Your investment options can be limited with an LLC 
• You can be subject to fairly costly annual maintenance fees 

Weigh up the pros and cons of each business structure, taking your aims and appetite for risk into consideration.

Now you need a business name to bring your brand to life.

Use GoDaddy's free business name generator to get the ideas flowing.

Once you’ve decided on your business name, choose the best domain name for you. If the dot-com you want isn’t available, opt for a .co.uk or .uk domain name. These web address endings are memorable and well-known and also considered more credible and trustworthy by British consumers.

Need help choosing a domain name? Read 10 tips for choosing the perfect domain name .

Editor's note: Save on startup costs by creating a great-looking logo yourself with the free logo maker from GoDaddy Studio .

6. Register your business and get the required licenses 

The next step in your how-to-start-a-business odyssey is registering your business and getting any required licenses.

By choosing your business name and settling on your business structure, you will have already started the registration process. To complete the registration process and obtain the right licenses, you will need to: 

• Check the full registration requirements depending on your legal structure
• Work though the registration requirements for the UK and the region where you’re looking to trade or operate
• Register for VAT and any other applicable taxes
• Obtain a Unique Taxpayer Reference (UTR) if hiring staff 
• File any relevant trademarks
• Find out which if any business licenses you need and start the application process

Related: Why a Google My Business listing is so important for your busine ss

7. Open a business bank account 

With your business almost up and running, you may want to open a bank account. This will keep your business and personal assets separate and make tax time easier.

You should choose a bank account with benefits and features that suit your business’s size as well as your goals. 

Tip: Create a short list of business bank accounts with flexible loan options as well as excellent customer service and online banking applications.

To set up your business bank account, you will need: 

• Official business incorporation documents 
• Your Unique Taxpayer Reference (UTR) or VAT registration number 
• Your official business name and address 
• The date your business was established 
• Your National Insurance number, personal address and date of birth

8. Get business insurance 

Depending on the type of business, you may also need to get business insurance. If you don’t, you could find yourself footing a colossal bill if any unexpected issues, damages or disputes arise.

Even as a small business, you may need to cover yourself with the right kind of insurance to protect yourself against any eventuality.

If you’re offering a service rather than tangible goods, it pays to get professional liability cover in case of any consumer-facing mistakes you might make.

You might also consider employment practices liability insurance as your business grows. This type of coverage will protect you against any potential employee claim or complaint.

9. Build your website 

At this point, you will be ready to build your website and bring your business to life. Your website or online store will be the digital front door of your business — so getting the design and the functionality just right is essential.

If you’re interested in building a website for your business, here are some hand-picked resources to help you out:

• Our guide to creating a website for your business  
• 10 things you should know about starting a business website  
• Low-cost SEO: A small business owners guide

To quickly create a website for free, try the powerful and easy-to-master GoDaddy Website Builder . Should you decide to start selling products in the future, it's easy to adding shopping cart functionality with a paid plan.

Related: How much does it cost to build website in the UK?

10. Launch and grow your business 

“There’s no shortage of remarkable ideas. What’s missing is the will to execute them.”—Seth Godin 

If you’ve followed all of the steps in this how-to-start-a-business guide, you’ll now be ready to launch.

Once you build a buzz about your big business launch across various channels including email and social media, you can start selling and take measures to grow year on year through marketing campaigns and sales initiatives. 

For many, starting a business is a challenging but rewarding venture. Be persistent, play to your strengths, take the time to ensure you’ve covered every base, and you’ll be winning on the commercial battlefield in no time. Best of luck.

Frequently Asked Questions  

Still have questions? The answers may be here.

How can I start my own business with no money?  

The best way to start your own business with no (or very little) money is to keep your day job while you’re getting established.

This is also the least risky way to start your own business.

Ideally, you need to start a business that has no (or minimal) upfront costs. It should also start generating revenue quickly for it to be sustainable.

If you keep your day job, you can reinvest your early profits back into the business to help you to grow. Hopefully, you'll reach a point where you’ll can quit (or scale back) your day job.

How can a beginner start a business? 

A beginner can absolutely start a business. As long as you have a clear idea of your goals and a passion for what you do, you can make your business a real success. Follow the steps on how to start a business detailed above and you’ll be up and running sooner than you might think.

How much money do you need to start a business from scratch? 

The cost of starting a business will vary depending on your industry or business model of choice. In a 2023 survey conducted by GoDaddy , 72% of UK small business owners payed ₤1,000 or less in set-up costs.

Many new companies fail, so it’s best to overestimate what’s needed as part of your business plan.

Can I run a business by myself? 

There is no reason that you can’t run a small business by yourself. With the right resources and the right approach, you can set up, launch, and operate your business.

Going solo is more than possible, but with so much to consider it’s a huge undertaking. As your business grows, hiring contractors or getting a partner on board will be a good idea. That way, you can further accelerate your commercial growth.

How do you create a legal organisation? 

To turn your business idea into a legal entity, here's a quick rundown of what you'll need to do:

• First, come up with a unique name for your business.
• Next, figure out what kind of business structure makes the most sense, such as a sole proprietorship, partnership, LLC or corporation.
• Pick a good location for your business and make sure you've got all the necessary permits and licenses.
• Get all your paperwork in order and register with the government.
• Set up your financials, like opening a company bank account and staying on top of your taxes.

Just remember, forming a business can be a bit complex, so it's a good idea to chat with a tax advisor or lawyer to make sure you're doing everything right.

What is the easiest business to start? 

A service-based business is often considered the easiest to start as you don’t have to deal in physical stock or inventory.

But, it’s never been more accessible to set up and launch a successful online business. In the digital age, tools exist to help you set up an ecommerce store or build a website without technical expertise.

With a little research, almost any kind of business will be within your reach.

What is the simplest legal form to start a business? 

A sole proprietorship is the easiest and least expensive legal business structure to set up. You will have complete control over the entire business, but be aware: you will be responsible for any debts as well as legal issues of the business.

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