Choosing the Best Legal Structure for Your Business - Part 1

Whether in New York, New York or Durham, North Carolina, choosing the legal structure of a business is one of the most critical decisions every entrepreneur faces at the outset of a new venture. The effects of this choice reach well beyond whether you might face personal liability, will impact how much you pay in taxes, the level of paperwork and formality required, and even the ability to raise funding.

To help ensure that Durham entrepreneurs will make the right choice for their businesses, this article will cover some basic considerations with regard to some of the most popular organizational structures, including the Sole Proprietorship, Partnership, Corporation, and the Limited Liability Company.

Sole Proprietorship

The most basic and most common business structure is a Sole Proprietorship. A sole proprietorship has no legally separate existence from the owner of the business. As a result, the owner may be held personally liable for all financial obligations of the business. Moreover, income and losses are taxed on the owner’s personal income tax return. Perhaps the greatest advantage of a sole proprietorship, however, is that there are extremely few formal requirements for starting and maintaining such a business, and owners therefore have greater control and flexibility in managing its operations. 


Another basic form of business structure is the Partnership. Much like the sole proprietorship, a partnership is a very basic legal entity, and is most commonly defined as one in which two or more people agree to share in the management, or profits and losses, of a business. The primary disadvantage of a partnership is that each partner may be held personally liable for all financial obligations of the business. The primary advantages are again similar to those of the sole proprietorship: profits and losses pass through the company to the individual income tax returns of the partners, and starting and maintaining the business entails few formal requirements.

Partnerships come in two varieties: the general partnership, and the limited partnership. In the former, each partner manages the business and assumes liability for the debts and obligations of the company. A limited partnership, however, is made up of a limited partner or partners in addition to a general partner or partners. Limited partners serve as passive investors and have no control over the company, with the advantage that they may not be subject to the same personal liabilities as a general partner. 


In Part 2 of this post, we will look at Corporations and Limited Liability Companies.

Michael E. Kohagen is an attorney with Crabtree, Carpenter & Connolly, PLLC, in Durham, NC.