Starting a new business is an exciting venture filled with opportunities and challenges. Among the first—and most critical—decisions you’ll face is choosing the right legal structure for your company. Your choice of entity will affect your personal liability, tax obligations, fundraising potential, and operational flexibility. To help you navigate this important decision, we’ve created a detailed guide to the most common business structures and the key factors you should consider.

1. Overview of Business Entities

Understanding the basic options available is the first step in making an informed choice. Each entity type comes with its own set of benefits, drawbacks, and legal requirements.

Sole Proprietorship

• Definition: A business owned and operated by one individual, with no legal distinction between the owner and the business.

• Advantages:

  • Easiest and least expensive structure to establish.

  • Complete control over business decisions.

  • Pass-through taxation, meaning profits and losses are reported on the owner’s personal tax return.

• Disadvantages:

  • Unlimited personal liability for business debts and legal claims.

  • Difficulty in raising capital beyond personal resources or loans.

  • Limited scalability for growth-focused businesses.

General Partnership

• Definition: A business owned and operated by two or more individuals who share profits, losses, and liabilities.

• Advantages:

  • Easy to form with minimal paperwork and costs.

  • Pass-through taxation for all partners.

  • Shared responsibilities and resources among partners.

• Disadvantages:

  • Unlimited personal liability for each partner, including debts incurred by other partners.

  • Potential for conflicts between partners over decision-making and profit distribution.

Limited Liability Company (LLC)

• Definition: A hybrid structure combining the liability protection of a corporation with the tax benefits and flexibility of a partnership.

• Advantages:

  • Limited liability protection for owners (members).

  • Flexibility in management and operational structure.

  • Pass-through taxation by default, with the option to be taxed as a corporation.

  • Suitable for a wide range of industries and business sizes.

• Disadvantages:

  • State-specific regulations can create complexity.

  • Potential self-employment tax implications for members.

S Corporation (S Corp)

• Definition: A special tax designation available to certain corporations and LLCs that enables pass-through taxation.

• Advantages:

  • Avoids double taxation, as profits pass through to shareholders and are taxed at the individual level.

  • Limited liability protection for shareholders.

  • Potential to save on self-employment taxes for owner-employees.

• Disadvantages:

  • Strict eligibility requirements, including a 100-shareholder limit and restrictions on shareholder types.

  • Administrative complexities, such as maintaining corporate formalities and filing annual reports.

C Corporation (C Corp)

• Definition: A standard corporation with its own legal identity, taxed separately from its owners.

• Advantages:

  • Unlimited growth potential, with no restrictions on the number or type of shareholders.

  • Ability to attract investors through stock issuance.

  • Lower tax rates on retained earnings under certain circumstances.

• Disadvantages:

  • Double taxation: corporate profits are taxed, and dividends distributed to shareholders are taxed again.

  • Increased regulatory and administrative burdens, including maintaining corporate formalities and filing separate tax returns.

Nonprofit Corporation

• Definition: A corporation organized for charitable, educational, or other exempt purposes, eligible for federal income tax exemption.

• Advantages:

  • Tax-exempt status for qualifying activities.

  • Eligibility for public and private grants.

  • Limited liability for directors and officers.

• Disadvantages:

  • Strict compliance requirements and limitations on profit distribution.

  • Subject to public disclosure of financial information.

2. Key Factors in Choosing Your Business Entity

The right entity depends on various factors unique to your business, including its size, industry, and long-term goals. Here are the primary considerations to guide your decision:

Liability Protection

Protecting your personal assets from business debts and legal claims is crucial. LLCs, S Corps, and C Corps provide limited liability protection, meaning your personal assets are generally shielded from creditors or lawsuits. In contrast, sole proprietorships and general partnerships expose owners to unlimited personal liability.

Tax Implications

Tax treatment varies significantly between entity types:

• LLCs and S Corps typically offer pass-through taxation, avoiding the double taxation that C Corps face.

• C Corps, however, may benefit from lower corporate tax rates on retained earnings and more deductions.

• Your choice should align with your anticipated income, profit distribution plans, and long-term tax strategy.

Fundraising and Investor Considerations

• C Corporations are often preferred by venture capitalists and institutional investors because they offer flexibility in issuing multiple classes of stock and accommodating complex capital structures.

• LLCs and S Corps, while suitable for smaller businesses, may face limitations in attracting outside investment due to ownership and structural restrictions.

Operational Complexity

• Sole proprietorships and partnerships are straightforward to set up and maintain, making them ideal for small or low-risk ventures.

• Corporations and LLCs require more formalities, such as annual meetings, record-keeping, and state filings. However, these requirements often justify the added protection and benefits.

Growth and Exit Strategies

Your entity should support your long-term goals. If you plan to go public or scale quickly, a C Corporation may be the best choice. For small businesses focused on steady growth, an LLC or S Corp may provide the right balance of flexibility and protection.

3. Common Scenarios and Recommendations

Scenario 1: A Solo Entrepreneur with Limited Capital

For a small business starting on a shoestring budget, a sole proprietorship or LLC may be ideal. An LLC offers liability protection while maintaining simplicity.

Scenario 2: A Family-Owned Business

An S Corporation can be a good choice, allowing family members to participate as shareholders while providing tax efficiency.

Scenario 3: A High-Growth Startup Seeking Venture Capital

A C Corporation is likely the best option, as it accommodates the fundraising and stock options favored by investors.

Scenario 4: A Charitable Organization

A nonprofit corporation is the clear choice, ensuring compliance with tax-exempt requirements and maximizing funding opportunities.

4. Consulting a Professional

Choosing the right entity is a foundational decision with far-reaching implications. Consulting an experienced attorney or tax advisor can help you navigate complexities, identify potential pitfalls, and make a decision that aligns with your goals.

At Lazarus, we specialize in entity selection and formation for businesses across industries. Whether you’re launching a startup, restructuring for growth, or planning for succession, we can provide tailored legal guidance to set you up for success.

5. Final Thoughts

Your choice of business entity is more than a legal formality—it’s a strategic decision that impacts your company’s financial health, legal standing, and ability to achieve its goals. By carefully evaluating your options and seeking professional guidance, you can lay the groundwork for a thriving business.

If you’re ready to take the next step, contact Lazarus to schedule a consultation. Let us help you build a solid foundation for your business’s future.