Small Business Webcast

Free Continuing Education for Small Business

Which Business Category is Right for You?

It’s exciting to open a small business. You have passion for your product or service, and motivation to work hard to make it successful. It may be tempting to dive in head first and leave some of the details for later. However, how you classify your business up front will affect you in may ways down the road. If you’re confused about whether you should consider sole proprietorship, partnership, corporation, or limited liability corporation (LLC), here are some of the advantages and disadvantages of each.

Sole Proprietorship

A sole proprietor owns all assets, keeps all profits, and has complete responsibility for all of the liabilities and debts of the business. Most small businesses start this way, especially if they do not great personal liability in their profession. Sole proprietorships are the easiest form of business to set up from a legal perspective, and offer the owner the greatest freedom in making decisions.

There are some drawbacks, however. Consider that you are personally responsible for any liabilities or debts that the business incurs. You do not have protection against lawsuits filed against your company, so if you are in a high risk industry, you need to carefully consider whether or not you could personally survive a large setback. There are tax implications as well. Depending on your expected income, you may pay taxes at a higher rate than if you incorporated. Not all expenses (such as owner’s medical insurance premiums) are fully deductible. If you choose to bring in a partner later and intend to convert your sole proprietorship to a corporation, there could be additional tax implications that your accountant can explain to you in further detail.


Legally similar to a sole proprietorship, a partnership is a sharing of ownership between two or more parties. Partnerships are relatively easy to set up. Unlike a sole proprietor, additional funds may be easier to come by with more people involved in the venture. Partners share in the profits based on their initial agreement, and share the responsibilities for any liabilities or debts.

When entering into a partnership, it is extremely important to have a clear legal agreement executed and reviewed by an attorney to avoid problems or conflicts in the future. Decisions are generally shared, as are profits, which can lead to disagreements. And like a sole proprietorship, there may be tax implications that can affect your business in the future.


Generally speaking, incorporating your business creates a separate and unique entity for your business. It creates a type of protection for the businessperson in that the corporation has the main responsibility for liabilities and debts (but note that there are still certain actions that can transfer some personal liability to the officers). Depending on income, corporations may be less in taxes than a sole proprietor. Corporations may have additional deduction opportunities, such as payment of benefits to employees and officers.

It may sound ideal, but incorporating takes time and money to accomplish. Corporation are more closely monitored by federal, state (and possibly local) agencies, and in general have more paperwork to comply with regulations. Again depending on income, taxes can be higher, and dividends paid to shareholders are not deductible, which could lead to double taxation.

Limited Liability Corporations (LLCs)

LLCs are attractive because they allow the business and its owners to reap some of the benefits of both sole proprietorships/partnerships and corporation. As with a corporation, owners have limited personal liability for the business liabilities and debts. Profit and loss can be allocated differently than the ownership percentages. IRS rules allow for LLCs to choose their tax structure – either sole proprietorship/partnership rates, or corporate rates.

LLCs are more complicated to establish than sole proprietorships or partnerships. As it is a relatively new concept in the business world, state laws vary and may not always reflect federal tax changes in a timely manner. LLCs are limited to enjoying only two of the four characteristics that define corporations.

Unless your business venture is extremely simple and uncomplicated, you may want to contact your certified public accountant and/or attorney to assist you in making the right decision as to how to classify your business. Investing in professional advice in the beginning can save a lot of headaches down the road.

Views: 138


You need to be a member of Small Business Webcast to add comments!

Join Small Business Webcast



Investing In Non-qualified Annuity by Subs Corp

Can a Subs investment in a nonqualified annuity?  If so, would the income be reported as other income?Continue

Started by David Jones in Tax & Accounting Jun 30, 2016.

Retirement fund for an S Corp owner 10 Replies

HiMy wife and I are the only 2 shareholders of our S Corp which we set up for her business.I would like to set up a retirement fund that is pre=approved by the IRS. Do you guys have any recommendations on that? We still haven't paid her any salary…Continue

Started by charyo in Tax & Accounting. Last reply by Mike Fox Jul 12, 2013.

How has Local Online Marketing Helped Your Business? 5 Replies

Really, I wanted to ask: a two-part question Part 1: How much new business are you gaining through local pages and review sites like Google Maps, Yahoo Local, Bing Business Portal, & Yelp?a) Less than 5%b) 5 -- 10%c)10 -- 25%d) more than 25%!!e)…Continue

Tags: maps, yahoo, bing, google, business

Started by Steven Good in Marketing for the Small Business Owner. Last reply by Edward Murray Dec 20, 2017.

Intro 5 Replies

Hello everyone, I see that I'm the first one to post an introduction here. Interesting. Anyhoooo I actually found this site from the Craig's list events section. Who knew? I've just started with a new company selling sustainable Disaster Resistant…Continue

Started by Demelza in Introduce Yourself. Last reply by Pat Mckemy Jan 14, 2014.



Created by Seattle CPAs

© 2023   Created by John Huddleston.   Powered by

Badges  |  Report an Issue  |  Terms of Service