Selecting the legal structure of your business is an important first step. Making that choice should not be a hollow exercise either. The type of structure you use has important consequences. It will dictate your taxing structure and will determine what type of legal protection your business entity will provide to you individually. For some businesses it will even make sense to create more than one structure. Also, certain types of businesses eliminate certain business structures as an option. It is important that you carefully consider what business structure will work best for your long term business goals. And you should not avoid seeking the advice of a professional tax consultant, accountant, and/or attorney before determining a legal structure. So what are some of your options? Below are explanations of some of the more commonly utilized business structures.

     1.     SOLE PROPRIETORSHIP

Sole proprietorships are a very common business structure. Independent contractors, for instance, are generally sole proprietors, whether they are aware of it or not. If a single individual operates a business and owns all of the business assets they are using a sole proprietorship. There are some downsides to this particular structure that that ought to be considered, particularly, that a sole proprietor is personally liable for all debts, and business ownership is nontransferable. That means if the business is sued, the sole proprietor is actually being personally sued and is at risk of losing their personal assets, not just the business assets.

Also, the life of the business is limited in course to the life of the individual proprietor because there is no legal distinction between personal and business debts, and it does not require a separate income tax return. Generally, a sole proprietorship is operated under the name of the owner; if not an Assumed Name Certificate must be filed with the county clerk.

     2.     GENERAL PARTNERSHIP

A general partnership is similar in form to a sole proprietorship, except that it exists when two or more individuals or businesses join to operate a single business. Although a separate business entity exists, creditors can still look to the partners' personal assets to collect debts. General partners share the company’s responsibilities equally. Unlike a sole proprietorship, a general partnership does require a separate annual partnership income tax return. You will also need to file an Assumed Name Certificate with the county clerk for the company name.

     3.     LIMITED PARTNERSHIP

A limited partnership has general partners with all the same rights and obligations as discussed above. The difference is that there are several limited partners that have only limited debt and liability obligations. Hence the term “limited.” Often limited partners will be investors seeking to put their money into a business and own a portion of that business without incurring significant liability. Usually, limited partners have little or no management control over a business, and thus they do want to be equally liable for business decisions. A limited partnership must register with the Secretary of State and maintain its entity status.

     4.     CORPORATION

Most people are familiar with the “corporation” business structure as it permeates American business. A corporation is a separate legal entity created for the purpose of operating a business. A corporation can be started by individuals or by other entities, but is a separate legal entity from its owners. Corporations act as a shield for business owners' personal assets from debts and liabilities relating to the operation of the business as long as certain rules are followed. As with a limited partnership, a corporation must be registered with the Secretary of State.

A corporation can be Subchapter C or S which has different tax, management, and immigration consequences. A C Corporation has a higher tax rate than an individual taxpayer. However, the owners are not taxed personally for profits, but they do pay personal taxes on any salaries and/or dividends. Even though the owners are not taxed personally for profits, the corporation is taxed on the profits. On the other hand, the owners of S Corporations may deduct business losses on their personal income tax returns, similar to the partnership structure.

     5.     LIMITED LIABILITY COMPANY

The Limited Liability Company is becoming increasingly popular. An LLC shares some of the aspects of Subchapter S Corporations and limited partnerships, but has more flexibility than those traditional business entities. It is designed to provide its owners with limited liability and pass-through tax advantages without some of the restrictions imposed on Subchapter S Corporations and limited partnerships. An LLC must be registered and maintained with the Secretary of State.

Selecting which of these structures is best suited for your business can be a complex calculation based on various factors that range from the type of business, to the forms of investment you will seek. Sole proprietorships are the simplest structure to understand, but they expose the business owner to the greatest personal risk. Corporations provide excellent legal protection (particularly in Texas), but they are more restrictive than other structures. This list is by no means exhaustive, but it is a good primer on the most commonly used structures and their characteristics.