Once you decide that you want to start a new business, you have to determine how you can best protect yourself and your business. One decision that you have to make is what legal structure you’ll use for the business. There are several to choose from, so be sure to consider the ones that offer the protections you need.
For a small business, there are three primary types of structures that might be considered – sole proprietorship, partnership, or limited liability company. Knowing the difference between these three can help you to make your choice.
What do sole proprietorship, partnership, and limited liability company mean?
A sole proprietorship has one owner. There is no division between the owner’s personal assets and the business’ assets. Typically, a sole proprietor files the business’ income on their personal income taxes.
A partnership has two or more owners who are operating the business together. The duties of each partner are outlined in the partnership agreement. Each partner pays taxes on the company’s profits through their personal income tax return.
A limited liability company is similar to a sole proprietorship; however, it places a barrier between the owner’s assets and the business’s assets. This means that if the business is sued, the owner’s personal assets can’t be used to satisfy any award to the complainant.
Anyone who’s starting a business should ensure they talk to their attorney to determine whether there are any special points they need to consider. This is also a chance to ensure that you have other things you’ll need in the course of your business, such as contracts that protect you.