Many founders ask the question about preferred legal form for their business. Selection of the appropriate legal status depends on a number of considerations. Key considerations are: a) legal and regulatory, b) tax, b) commercial or economic, c) administrative. Most of this publication covers tax-related and commercial considerations (e.g. consideration covering responsibility of owners). We also touch on certain administrative aspects of registering and maintaining a business.

Key types of business structures include:

  • Sole proprietorships;
  • Partnerships;
  • Corporations;
  • Limited liability company;

Each structure has distinct tax implications. Specifically, sole proprietors and partnership members are subject to self-employment tax on their earnings, while S corporation owners can take a salary subject to payroll taxes with remaining profits exempt from self-employment tax. C-corporations are subject to “double taxation”, i.e., taxation at the entity and shareholder level. However, C-corporations offer certain benefits in raising capital. LLCs offer flexibility in tax classification, combining elements of both corporations and partnerships. Additionally, state regulations impact business formation and operation, with specific rules for regulations professions, e.g. accounting, legal or medical practices.