There are several factors to consider when deciding what structure is best for your business. Although cost and convenience of your business should be a consideration, it is not the major consideration that will affect your business in the long run. The business structure you choose will affect your ability to control the decision-making and management, your liability to third parties, and the taxes you pay personally for your business. It is therefore important to understand the basics about the different business structures and affects of each, when deciding what structure is best for your business.
LIABILITY
Depending on the business structure you decide is best for your business, you can be either "jointly and severally liable," or virtually not liable at all to third parties. Under most circumstances, LLCs and Corporations are liable to third parties, thus freeing the business owner from liability. However, there is an exception where the courts can Pierce the Corporate Veil, which has the affect of passing the liability of the business entity to the individual owner(s). Conversely, Sole Proprietorships and Partnerships hold each owner "jointly and severally liable." This means each owner is individually liable. Creditors and parties that may win suits against the business can collect the full amount from any and all of the owners to the extent the liability is resolved. The owners can then seek recovery from the other owners according to liability agreements among owners and/or fault.
TAXES
Pass-Through Taxation
The type of business structure that you decide is best for your business will affect your tax liability in two ways. Either you will experience "Pass-through Taxation" or "Corporate Taxation" (Double Taxation). In "Pass-through Taxation," the earnings/losses are passed from the business to the business owner, thus giving the affect of only being taxed once, on the business owner's personal taxes. Choosing this business structure can have positive and negative consequences depending on the productivity of the business. If there are losses, those losses are passed to the individual owner, offsetting the tax liability from the owner(s)' personal earnings. However, if there are larger profits, those profits also pass through to the personal tax liability of the individual owner(s). This can propel the owner into a higher tax bracket, thus forcing the owner to pay more taxes, even if the owner is not cashing out the money for personal use. The entities that bring this effect to the business owner are Sole Proprietorships, Partnerships, S-Corporations and sometimes LLCs.
Corporate Taxation (Double Taxation)
Under "Corporate Taxation," earnings are taxed twice. Earnings are taxed at the corporate level, and then at the personal owner level when the earnings are distributed. This is usually less desirable for smaller start-up businesses because it leaves less money to be used either for the business or by the business owner. However, there are some other tax benefits from choosing a business structure that has corporate taxation. The business entities that use this taxation are C-Corporations and sometimes LLCs.
CREATION
The creation of the different business structures varies according to which structure you decide is best for your business. Sole Proprietorships are created by merely acting as one, even without filing anything with anybody. LLCs and corporations typically cost under $1,000 to create, unless you have needs for complicated shareholder agreements (for Corporations) or operating agreements (for LLCs).