Choosing the right business structure isn’t rocket science, but getting it wrong could really set you back. So, while you can probably decide which form to use on your own, make sure to run your by an attorney to make sure you have covered all your bases!

The most common structures are: a sole proprietorship, general partnership, limited partnership, limited liability company, S corp or C corp. Factors to consider include:

• The size and nature of the business
• Number of owners
• Management style
• Sources of capital
• Tax implications
• Degree of liability protection
• Degree of formal structure you can maintain

Sole Proprietorship

As the name implies, this business structure is used by business owners who are flying solo. The nature of the business could be anything from selling online goods to delivering professional accounting services. This business form gives the greatest flexibility with management style, since the single owner-operator is not accountable to anyone else in the business.

Another advantage of a sole proprietorship is that it’s easy to set up. There are relatively few formalities, and many sole proprietors will register under a trade name such as  “John Smith d/b/a Smith Plumbing” (“d/b/a” is short for “doing business as.”)

The big drawback to a sole proprietorship is that it doesn’t offer any legal protection. Your business liabilities are treated as your personal liabilities. So if your business were to run into trouble, it could take you down with it.

General Partnership

A partnership is an association of two or more people to carry on business for a profit. Although a partnership agreement is not legally required, it’s a best practice to have a partnership agreement that governs things like: how the business will be run; each partner’s capital contribution; how profits and losses will be split; each partner’s authority and responsibilities; etc.

An obvious advantage of a general partnership is that you can bring in other people (or companies) into your business. The biggest downside is that a general partnership doesn’t provide any liability shield. Each general partner is personally liable for the partnership’s obligations, and the actions of one partner will be binding on the others. A partnership is a pass-through tax entity, so partnership gains and losses will be passed on to the individual partners for tax purposes.

Limited Partnership

A limited partnership is like a general partnership, except that there is a general partner and then one or more limited partners. The general partner can be an individual or a corporation, and will be liable for the partnership’s debts. The general partner usually controls the major business decisions of the partnership, while the limited partners are usually more passive investors. However, the limited partners are only liable to the partnership up to the amount of their capital contribution.

C Corporation

This is a default corporate structure unless you elect to be an S Corporation. A corporation is a separate legal entity, created by state law, which shields shareholders from personal liability. Other advantages of a corporation are that it centralizes the management of the business, and makes it relatively simple to transfer ownership interests (by selling shares). C corps can issue multiple classes of stock (e.g. common, preferred) which can be very useful when raising capital from multiple sources (debt and equity).

Corporations have broad powers. They can sue (and be sued); purchase and sell property; lend or borrow money; make contracts; make charitable donations; elect directors; provide life insurance; and much more. On the down-side, profits from C Corps are taxed twice: once at the corporate level, and again at the individual level. Corporations also require several legal formalities both during the formation and operation of the business, such as keeping adequate business records and separating business finances from personal assets. Not observing corporate formalities can land a business in hot water, and sometimes judges will ignore the corporate shield (known as “piercing the veil”) and hold shareholders personally liable.

S Corporation

Some businesses may qualify to incorporate as an S Corp. The main difference between a C Corp and an S Corp is that S corporations pay no taxes on profits. In other words, S Corps are treated like a pass-through tax entity. However, to qualify as an S Corp (at least in Georgia), a business cannot have more than 100 shareholders and no shareholders can be non-resident aliens. Also S Corps are restricted to issuing just one class of stock.

Limited Liability Company

Technically, a Limited Liability Company, or LLC, isn’t a corporation but it combines the best of both worlds: it has pass-through tax status (like a partnership or sole proprietorship), but provides a legal shield for its owners (like a corporation). An LLC can be managed by the members, or by a separate entity. LLCs generally have simpler formalities than corporations, and are often preferred by small business without very complex needs.