Choosing the Right Business Structure: Legal Considerations for Entrepreneurs

Launching a business marks the beginning of an exciting journey. Whether you are building a tech startup, starting a consulting practice, or turning a passion project into a full-time venture, one of the first decisions you will need to make is how to structure your business. This choice has long-lasting consequences, affecting everything from how you pay taxes and manage liability to your ability to raise capital or bring on partners.

The three most common business structures are the sole proprietorship, the limited liability company (“LLC”), and the corporation. Each offers distinct advantages and drawbacks depending on your goals, the nature of your work, and your risk tolerance.

Sole Proprietorship

A sole proprietorship is the most straightforward form of business. It typically requires no formal registration beyond any necessary licenses or permits, and profits are reported directly on your personal tax return. For entrepreneurs just getting started, this option may seem attractive due to its low cost and ease of use. However, it comes with a significant tradeoff because there is no legal separation between you and your business. If the business is sued or incurs debt, your personal assets, including your home and savings, are at risk. Sole proprietors may also face difficulty raising outside funds or building business credit.

Limited Liability Company

For those who want greater protection while keeping operations relatively straightforward, forming an LLC is often the next logical option. An LLC, while not a complete shield, can offer personal liability protection, meaning your personal assets could be shielded from business debts or legal judgments arising out of the actions/inactions of others who are part of the business or its operation. At the same time, LLC’s benefit from pass-through taxation (being taxed either as an individual, a partnership, or elected S Corporation), so profits and losses flow directly to the owners’ personal tax returns without being taxed at the entity level. LLC’s are also highly flexible. They can be owned by one person or multiple members and are typically governed by an operating agreement that outlines how the business will be managed. LLC’s can be used when there is a desire to raise capital from others. An LLC offers a combination of liability protection, flexibility, and manageable administrative requirements, which makes it an appealing choice for startups, small businesses, and partnerships. However, it still involves some formal requirements, such as filing formation documents with the state and complying with any ongoing state obligations like annual reports or fees.

Corporation

A corporation is also a separate legal entity and can continue to exist perpetually, independently of its founders.  A corporation can also be a pass-through entity for tax purposes but also can be its own taxable entity with the required filing of a tax return and payment of corporate taxes from the entity when that makes business sense.  In the case of C corporations, this may result in double taxation — once at the corporate level, and again when dividends are distributed to shareholders. The S Corporation election can be an alternative to allow for pass-through taxation. A corporation can also be used when there is a desire to raise capital from others. Corporations do come with stricter governance requirements, including maintaining corporate records, holding annual meetings, and observing other formalities. The liability protection of a corporation is similar to an LLC, but when the corporate formalities are followed, a corporation provides strong liability protection.

Choosing the right business structure involves thinking not only about where your business is now, but where you hope to take it. Are you planning to grow quickly and bring in investors? Do you intend to work independently for the foreseeable future? Would liability protection give you peace of mind in the event of a dispute or loss? These are key questions that should shape your decision.

Regardless of the structure you choose, it is important to operate your business with appropriate legal formality. LLC’s, while often less administratively demanding than corporations, still require separate financial accounts and good recordkeeping and can benefit from written operating agreements. Early conversations with a tax professional may also help ensure your chosen structure aligns with your financial strategy and avoids unnecessary taxation.

While it is possible to restructure a business later, doing so may be expensive and legally complicated. Taking the time to make the right decision at the start helps lay a strong foundation for future growth and stability.

When in doubt, consulting with a business attorney and your tax advisor can provide valuable guidance tailored to your specific situation. Establishing the right structure at the outset will allow you to focus on building your vision, knowing your business rests on sound legal footing.

© Riley Bennett Egloff LLP

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Posted on May 7, 2025, by J.T. Wynne