Before you are ready to start your business, you need to ask yourself the question what form of business organization will you choose? There are five different business structures. You need to understand the pros and cons, taxes, and legal ins and outs each structure carries before you arrive at a decision. It is critical that you make the best choice based on your personality, financial situation, and business philosophy.

Sole Proprietor

One individual owns and operates the business. S/he is liable for all business debts and actions, and is also the only beneficiary of business profit as well as a "draw-down" of outside income if a business loss occurs. This form of business is very simple to organize, and the owner has total freedom to make decisions. Register with the state government as a new enterprise by purchasing a business license and you are ready to go.

Disadvantages

Unlimited liability of the owner, which extends to personal assets such as home, vehicle, and savings

Partnership

Two or more individuals make a contract with each other and jointly operate a business. Each partner contributes cash, property, and/or services for the purpose of making a profit. Easy to organize, and has greater financial and human strength than a sole proprietorship.

Disadvantages

	Unlimited liability among partners
	Decision-making is divided, and fallout among partners is always a possibility
	Elimination of any partner results in automatic dissolution of the partnership

"C" Corporation

An organization that has its own legal identity, rights, and liabilities. Stockholders have limited liability, so they are not personally liable for business debts and liabilities. Life of the business is perpetual, and owners enjoy tax-deferred fringe benefits.

Disadvantages

	Extremely difficult, expensive, and time consuming to organize
	The business and the owners are both taxed on the same income
	Subject to more state and federal controls
	Losses must be carried over to a year that has profits and therefore cannot "draw-down" other sources of income outside of the corporation

"S" Corporation

Very similar to a "C" Corporation, but approval from the IRS is needed to be taxed as an "S" Corporation. Similar to a partnership, profits or losses are not subject to self-employment taxes and are passed through to shareholders therefore avoiding the double taxation of the "C" Corporation. It also allows the shareholders to have the benefit of offsetting business losses incurred by the corporation against the income of the shareholders. An "S" corporation has the same limited liability as a regular corporation.

Disadvantages

	Fringe benefits are restricted
	There are limits on contributions to a qualified retirement plan
	An "S" Corporation cannot have more than 75 shareholders

Limited Liability Company or Partnership (LLC or LLP)

A hybrid structure, recognized by all 50 states, with unique taxation qualities depending upon the Federal tax designation chosen on the initial filing. This entity can combine the pass through of profits like a partnership, with the limited liability of a corporation. An LLC or LLP offers a broader financial protection for its' owners by setting rational limits to the exposure of the "out-of-pocket" expenses and insulating the personal assets for each of the owners. Avoids most of the "S" Corporation restrictions, and is far less costly to organize than a corporation. An LLC or LLP can be taxed as a sole-proprietorship, partnership, or a corporation depending on the needs of the owners and the boxes checked on the initial Department of Financial Institutions filing.

Disadvantages

Some states require LLC's to have more than one owner. Wisconsin does not.

Links Other Legal Sites

Want to learn more about legal structures? Visit these links for more information.