One of the first decisions to make when starting a business is choosing the most appropriate legal structure for your business. Every business is required to operate under a legally recognized business structure. Listed below is a summary of the four basic business structures.  Additional information on business structures is available from the U.S. Small Business Administration, the Internal Revenue Service, and the Kentucky Secretary of State.

There are several important factors to consider when choosing a business structure. Two of the most important questions to answer are: 1) how does the structure impact my personal liability for things that happen in the business; and 2) how does the structure affect the amount of tax I will have to pay?

It is good, sound business judgment to seek advice from an accountant and/or attorney before starting a business. The particular structure you choose may save you money and provide greater protection of your personal assets, such as your house, vehicle, etc. The information below is intended to provide a quick summary of basic business structures, but it should not be considered a substitute for professional legal or tax advice regarding your business.


Sole Proprietorship

A sole proprietorship is generally considered the simplest form of business organization. The business has no existence apart from you, the owner. The liabilities of the business (such as taxes, loan payments, etc) are your personal responsibility. In addition, your personal assets may be exposed to risks associated with operating a business.

While sole proprietorships can have employees, many entrepreneurs start their small business as a sole proprietorship because they don’t intend to hire any employees initially. In addition, the limited amount of paperwork to establish a sole proprietorship is appealing. Many individuals, however, overlook the personal liability aspect of this form of ownership. The liability risk factor of personal assets (such as your home, personal vehicles, etc.) should be seriously considered when evaluating whether a sole proprietorship is the best form of ownership for your business. Other forms of business ownership (such as corporation or limited liability company) can be considered, even for a one person business.


Partnership

General Partnership
A general partnership is the relationship existing between two or more persons who join together to carry on a trade or business with each person contributing money, property, labor, or skill, and each expecting to share in the profits and losses of the business. Any number of persons may join in a partnership.

You and each of your partners are personally liable for all business debts and, to a point, liable for certain acts of your partners. Each partner can incur debts, sign contracts, and make business obligations. It is best to consult an attorney when drawing up your partnership agreement so that each partner clearly understands from the beginning the rights and obligations each partner has to the business.

A limited liability partnership is a special type of general partnership. As the name implies, this type of partnership provides some stronger liability protection for the partners with respect to the actions of the other partners.

Limited Partnership
A limited partnership has one or more general partners responsible for managing the business and liable for the total debts incurred. This type of partnership also includes one or more limited partners who are liable only to the extent of their investment. Again, it is best to consult an attorney when forming a limited partnership so that rights and obligations are clearly defined in the partnership agreement.

A limited liability limited partnership is a special type of limited partnership. This type of partnership generally provides greater liability protection for the general partners of a limited partnership.


Corporation

A corporation is typically considered the most complex form of business structure. A corporation has a separate legal status apart from its owners. A corporation issues stock and is owned by its stockholder(s), but is not necessarily managed by a stockholder.

A corporation is liable for its own debts and taxes, and is generally free to retain or distribute its income. The stockholders and company officials are almost always protected from personal loss, other than their investments in company stock, if the company is sued or goes out of business.

An S corporation is a special type of corporation limited to smaller businesses. It provides some potential tax advantages over the C corporation designation. Additional information on S corporations, including Form 2553, Election by a Small Business Corporation (to be taxed as an S corporation) and Form 2553 Instructions, is available from the Internal Revenue Service.

In Kentucky, a corporation can consist of one or more owners. You don’t have to employ others to consider establishing a corporation. In other words, a corporation is a valid form of business ownership for a one person business.


Limited Liability Company

A limited liability company (LLC) is a business structure that combines the limited liability advantages of a corporation while providing some flexibility in how you choose to be taxed. Similar to a corporation, the LLC separates the owners (members) personal liability from the obligations of the business. IRS publication 3402 provides additional information on federal LLC tax issues. An LLC can be established by one or more individuals or business entities referred to as "members".