Analogy: You ARE the business.

This is the simplest and most common structure. If you start doing business by yourself and don’t register as anything else, you’re automatically a sole proprietor.

• Liability: 🔴 None. There’s no legal separation between you and the business. If the business is sued or has debts, your personal assets (car, house, savings) are at risk.
• Taxation: Simple “pass-through” taxation. You report business income and losses on your personal tax return (Schedule C).
• Formation: Easiest. No formal action required to form. You might need local licenses or permits.
• Best for: Freelancers, consultants, or single-owner businesses just starting out with low risk.

Analogy: A Sole Proprietorship with a friend (or two).

A partnership is a business owned by two or more people. The default is a “General Partnership,” where all partners share in profits, management, and liability.

• Liability: 🔴 None. Similar to a sole proprietorship, partners are personally liable for business debts. You can even be liable for debts created by your partner!
• Taxation: “Pass-through” taxation. The business itself doesn’t pay taxes. Profits and losses are “passed through” to the partners, who report them on their personal tax returns.
• Formation: Relatively easy. A partnership agreement is highly recommended but not always legally required.
• Best for: Two or more people starting a business together who understand and accept the personal liability risks.

Analogy: The best of both worlds.

The LLC is a hybrid structure that is extremely popular with small businesses. It combines the liability protection of a corporation with the tax simplicity of a sole proprietorship or partnership.

• Liability: 🟢 Strong! This is the key benefit. It creates a “liability shield” that separates your personal assets from business debts. If the LLC is sued, only the business’s assets are at risk.
• Taxation: Flexible. By default, it’s a “pass-through” entity (like a sole proprietorship or partnership). However, an LLC can elect to be taxed like a corporation if it’s beneficial.
• Formation: Requires filing “Articles of Organization” with the state and paying a fee. More complex than a sole proprietorship, but manageable.
• Best for: Almost any small business owner who wants to protect their personal assets. It’s the go-to for most new businesses.

Analogy: The heavyweight champion.

A corporation is a completely separate legal entity from its owners (shareholders). It provides the strongest liability protection but comes with more complexity and formal requirements (e.g., board meetings, bylaws).

• Liability: 🟢 Strongest. The corporate veil provides excellent protection for owners’ personal assets.
• Taxation: This is where it gets tricky. There are two main types:
  • C Corporation (C Corp): Subject to “double taxation.” The corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive.
  • S Corporation (S Corp): A special tax election that allows profits to pass through to the owners’ personal income, avoiding double taxation (like an LLC). It has strict eligibility requirements (e.g., limited number of shareholders, all must be U.S. citizens).
• Formation: Most complex. Requires filing “Articles of Incorporation,” creating bylaws, issuing stock, and holding regular board meetings.
• Best for: Businesses planning to seek investment from venture capitalists (who almost always require a C Corp) or businesses that can benefit from the corporate tax structure.