The four common structures
| Structure | Personal liability | Taxation (typical) | Setup & admin |
|---|---|---|---|
| Sole proprietorship | Unlimited — you are the business | Profit taxed as your personal income | Lowest |
| Partnership | Usually shared and unlimited (general partners) | Profit passes through to partners | Low, but needs a partnership agreement |
| LLC / limited company | Generally limited to the business's assets | Flexible; often pass-through in the US | Moderate |
| Corporation | Limited to the business's assets | Corporate tax, then tax on dividends; some regions offer small-business rates | Highest |
Names and rules differ by country: an "LLC" is a US concept, while Canada, the UK, Australia and India use incorporated or private limited companies with their own tax treatment. Use this as a framework, then confirm locally.
Sole proprietorship: fast and simple
You can often start the same day with nothing more than a trade-name registration and any required licences. The trade-off is risk: business debts and lawsuits can reach your personal assets. It suits low-risk service businesses testing an idea.
Partnership: shared ownership, shared risk
Two or more people own the business together. Without a written agreement covering contributions, profit splits, decision-making and exit terms, partnerships are one of the most common sources of small business disputes. Write the agreement before you need it.
LLC or limited company: the popular middle ground
Limited liability means business debts generally stay with the business, provided you keep finances separate and don't personally guarantee obligations. Many lenders still ask owners for personal guarantees, so liability protection isn't absolute. Fees and annual filings are modest in most places.
Corporation: built for investors and scale
If you plan to raise equity investment, issue shares to employees, or retain large profits in the business, a corporation is often the right vehicle. Expect formal requirements: directors, minutes, separate tax returns and more accounting cost.
Five questions to decide
- Could a customer, employee or supplier realistically sue you for more than you could pay?
- Will you take on significant debt, leases or inventory?
- Do you expect profits high enough that a different tax treatment would save money?
- Will you bring in partners or investors?
- How much admin and accounting cost can you absorb this year?
Changing later
Many businesses start as sole proprietors and incorporate once revenue and risk grow. Converting is usually possible but can involve new registrations, bank accounts, contracts and tax filings, so it's worth planning ahead.
Need help forming or reviewing your structure? Get matched with a business lawyer or formation service. This guide is general information, not legal or tax advice.