Formations & Startups

A major deciding factor when structuring your business is often the degree of control you want to retain over your business. This is especially true where multiple owners are involved.

A sole proprietorship allows for the fullest control. As the only owner and operator, a sole proprietor can run their business however they want. In comparison, corporations are answerable to shareholders, who may elect a board of directors to manage the organization's day-to-day business.

Your business structure also determines the extent of your personal liability for the liabilities, debts, and obligations of the business. Some structures offer better protection against personal liability. However, liability and control are usually directly proportional. The less your personal liability, the less control you typically exercise over the business.

In a sole proprietorship, for example, the owner is personally responsible for the business's liabilities and debts. Their personal assets may be used to satisfy the business's debts. They can also be sued in relation to the business's activities.

In comparison, in a limited partnership, partners have a separate legal identity from that of the business, and their personal liability is limited to their investment in the business.

Normally, the structure of a business determines the applicable tax regime. For example, if an entity elects to be treated as a sole proprietorship, or S corporation, it would be considered a pass-through entity. This means the business doesn't separately pay tax. Instead, the tax liability is passed to the owners, who pay taxes on the business profits via their personal tax returns.

Other forms of incorporation, like C corporations, are treated as separate entities from their owners and taxed according to the relevant corporate rate.

The degree of administration of a business typically becomes more onerous as the complexity of the business structure increases.

Sole proprietorships and partnerships typically have the least complex paperwork, while corporations have strict reporting obligations and complex paperwork to file when forming and running the business.