Choosing a Business Structure

"What should I set up?" is one of the first questions every founder faces, and the honest answer is "it depends." But the factors it depends on are few and knowable. Here's a plain-English guide to the main options and how to choose between them.

What the structure actually decides

The business structure you choose shapes three things above all: how much personal risk you carry, how you're taxed, and how much paperwork you have to keep up. It also affects how easily you can raise money and bring in owners. The good news is that the realistic options are few, and the trade-offs are knowable.

• Personal liability — whether your own assets are shielded from business debts
• Taxes — whether profits are taxed once or twice, and on whose return
• Formality — how much record-keeping and how many filings you must maintain
• Fundraising — how easily you can bring in investors or co-owners

Notice that these four factors often pull in different directions. The simplest structure to run may offer the least protection; the one investors prefer may carry the most paperwork. There's rarely a single "best" answer — only the option that best fits where your business is today and where you realistically expect it to be in a couple of years.

The common options

Most small businesses land on one of a short list of structures. Here's the plain-English version of each.

• Sole proprietorship: simplest and cheapest, but offers no liability protection
• LLC: limited liability with light paperwork and flexible, pass-through taxation
• Corporation: more formal, expected by investors, with stock to grant equity
• Partnership: for multiple owners, but general partners carry personal liability

For many small, owner-run businesses the LLC has become the default because it balances real liability protection with minimal upkeep. But defaults aren't decisions. If you expect to raise venture capital, grant equity to a team, or take on several co-owners, a corporation's more formal framework usually pays off despite the extra administration.

How to decide

The right answer depends on a handful of questions about where the business is headed. Work through these before you file, because changing structure later — once you have investors or employees — is harder.

• Will you raise outside investment, or stay owner-funded?
• How many owners are there, and how do you want to split profits?
• How much administrative formality are you willing to maintain?
• What does your accountant say about the tax impact at your income level?

Because the legal and tax factors interact, choosing a structure is a decision worth talking through with both a lawyer and an accountant before you file. It's a foundation you'll build on for years, so it's worth a little thought up front.