Turning a business dream into reality takes more than just a great idea and motivation — it requires a solid foundation that starts with choosing the right business structure.
You can think of your business structure similarly to a foundation of a house — build it right, and you’ll have a strong, protected enterprise that can stand the test of time. But get it wrong, and you might find yourself personally liable for debts or drowning in unnecessary paperwork and corporate taxes.
In this guide, we’ll explain why a limited liability company (LLC) is often the most practical choice for new businesses and examine the drawbacks of other structures, providing you with all the information you need to make a well-informed decision.
Ready to get started? Forming an LLC is generally the best idea for most small and new business owners as it offers legal protections, managerial flexibility, and comes at a low cost.
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Choosing a Business Structure
Generally speaking, for most new businesses — and in most cases — a limited liability company (LLC) will provide an ideal balance of affordability, flexibility, protection, and simplicity.
This is because an LLC combines the flexibility and straightforward management of a sole proprietorship or partnership with the liability protection that’s typically associated with a corporation, giving your business a “best of both worlds” scenario.
Below we have broken down the most significant reasons for why an LLC will likely be the best choice for your venture:
- Liability Protection: One of the main advantages of forming an LLC is that — as a member — you will not be personally responsible for the business’s debts or legal claims, meaning that your personal assets (e.g., home, car, savings, etc) will be protected.
- Pass-Through Taxation: Another advantage of LLCs is that they are generally treated as pass-through entities, meaning that profits and losses are passed directly to the members’ personal tax returns, avoiding the double taxation that’s faced by corporations.
- Operational Flexibility: A third significant advantage of LLCs is their operational flexibility. LLCs aren’t required to maintain a formal board of directors, hold annual meetings, or keep extensive records, which allows owners to focus more on their daily operations instead of on administrative tasks.
- Flexible Profit Distribution: In addition to operational flexibility, LLCs offer flexibility in profit distribution, allowing members to divide profits in a way that doesn’t need to match ownership percentages.
- Ease of Formation and Maintenance: Finally, setting up an LLC is not only simpler and more affordable than many other business structures, but it’s also easier to maintain over time, making it an accessible choice for new business owners.
Depending on the type of organization you’re starting, it might make more sense to structure it as a nonprofit, with the most common choice in that case being a corporation.
This will allow your organization to qualify for tax-exempt status and establish a formal governance framework, though LLCs and trusts can also work but are more dependent on specific state regulations.
That said, we always recommend consulting with a professional accountant prior to finalizing your decision if you believe a nonprofit is the right choice for you.
Is an LLC Always the Best Choice?
While an LLC is a popular and practical choice for most small new businesses, in some limited cases, alternative structures like corporations, partnerships, or sole proprietorships may better align with your business goals.
Below we’ve broken down the most important reasons an LLC might not be the right fit for you:
- Seeking Outside Investment or Going Public: If your business plans involve attracting substantial outside investment or eventually launching an IPO, a corporation may be a better choice, as corporations can issue stock — a feature that appeals to investors and simplifies the public offering process.
- Prioritizing Simplicity and Low-Cost Setup: For solo entrepreneurs or very small businesses with lower liability exposure, a sole proprietorship can be the most cost-effective option, as it’s the simplest structure to establish with minimal fees and far less paperwork than LLCs or corporations. Then again, this also means that you won’t have a separate business bank account for your invoices (which can make you look less legitimate).
- Requiring a Defined Management Structure: In situations where a clear, hierarchical management structure is essential — such as businesses with multiple levels of authority — a corporation may offer better organization and accountability by establishing formal roles for shareholders, directors, and officers, which can help ensure there’s clear lines of responsibility in place.
Note: A partnership may be a good idea if your business involves two or more individuals who wish to share management responsibilities and profits without the formalities required by corporations or LLCs — in a lot of cases partnerships can be created informally.
That said, this will require a high level of trust and open communication, as a partnership generally means that all partners are jointly responsible for business decisions, liabilities, and financial obligations.
There is also little benefit to going this route, as the cost of forming an LLC — especially when split with another business partner — is so insignificant that it’s difficult to argue that it does not warrant the additional legal and structural benefits that come with it.
How to Start an LLC
Okay so after establishing that an LLC is most likely the best choice for you, you might be wondering how you can go about getting started.
Well, the process is actually relatively simple, and can be done independently, with a business attorney, or with the help of a professional LLC formation service (recommended).
If you’re interested in doing it yourself to save a bit of money, you will need to complete the following state-specific steps:
- Find a name that complies with your state’s LLC naming guidelines.
- Find a registered agent (or act as your own).
- File your formation documents with your state (known as the Articles of Organization or Certificate of Formation).
- Obtain an EIN — think of this like your business’s Social Security Number.
- File a BOI report.
The reason we recommend avoiding this route is because: a) the cost of professional service is insignificant, with many offering pure LLC formation at NO cost, and b) you’ll likely want to avoid acting as your own registered agent, as this can cause endless headaches and means that your personal information will become publicly available.
Next Steps
DIY: See our How to Start a Business article.
Use a Vetted Service: Tailor Brands ($0 + State Fees) or see our Best LLC Formation Services review.
Choosing the Right Business Structure FAQs
What is the right structure for my business?
For most new businesses, the “right” structure will most likely be forming an LLC.
Having said that, if you’re seeking investors or planning an IPO, you may consider forming a corporation instead.
Interested in finding out more? Check out our How to Choose the Right Business Structure guide.
What are the four most common business structures?
The four most common business structures are sole proprietorships, partnerships, limited liability companies, and C Corporations.
Once you’ve chosen a structure that fits your needs, you can have a look at our How to Start a Business article for a step-by-step approach to launching your business.
How can I set up an LLC?
To set up an LLC, you will generally need to choose a unique name, appoint a registered agent, and file your LLC’s Articles of Organization with your state.
You should also create an operating agreement for your LLC — even if not required by your state — to clearly define ownership structure, management roles, and decision-making processes.
What is the best business structure for a single owner?
The best business structure for a single owner will often be an LLC, as it provides personal liability protection and flexible tax options.
That said, a sole proprietorship may suit those who prefer a simpler, lower-cost setup; however, it will lack the benefits that a separate legal entity would offer, meaning personal and business assets are not distinct.
Which type of business entity pays the least taxes?
Even though certain types of business entities pay less tax by default, the total amount of taxes you’ll owe will ultimately depend on factors like your income, deductible expenses, eligible credits, and how profits are distributed within your company.