Use the descriptions below to learn more about each basic business structure. These in-depth explanations will also help you weigh some of the advantages and disadvantages of these options.

Proprietorships
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, the sole proprietor is one in the same with the business.

Advantages of a sole proprietorship:

• Easiest and least expensive form of ownership to organize
• Allows complete control, with sole decision-making power within the parameters of the law
• All income generated by the business can be kept or reinvested
• Business profits flow directly to the owner's personal tax return
• The business is easily dissolved

Disadvantages of a sole proprietorship:

• Legal responsibility for all liability and risk-both business and personal-falls on the sole proprietor
• Limited funds from personal savings and/or consumer loans
• Difficult to attract high-caliber employees motivated by the opportunity to own a part of the business
• Some employee benefits, such as the owner's medical insurance premiums, are not directly deductible from business income (only partially deductible as an adjustment to income)

Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Partners must decide up-front how much time and capital each will contribute. It's difficult to think about a breakup when the business is just getting started, but many partnerships split up in times of crisis. Unless there is a defined process, there is great potential for disputes. 

Advantages of a partnership:

• Relatively easy to establish, even with the time invested to develop the partnership agreement
• Fund-raising may be facilitated with more than one owner
• Business profits flow directly to the partners' personal tax returns
• Prospective employees may be attracted to the business if given the incentive to become a partner
• Partners' complementary skills often benefit the business

Disadvantages of a partnership:

• Partners are jointly and individually liable for the actions of the other partners
• Profits must be shared
• Potential for disagreements with joint decision-making
• Some employee benefits are not deductible from business income on tax returns
• Withdrawal or death of a partner may abruptly end the business

Types of partnerships that should be considered:

• General Partnership. Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
• Limited Partnership and Partnership with Limited Liability. Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
• Joint Venture. Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.

Corporations
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. 

Advantages of a corporation:

• Shareholders have limited liability for the corporation's debts or judgments against the corporations
• Generally, shareholders can be held accountable only for their investment in stock of the company. (However, officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
• Corporations can raise additional funds through the sale of stock
• A corporation may deduct the cost of benefits it provides to officers and employees
• A corporation may elect S corporation status, which allows a company to be taxed much as a partnership is, if certain requirements are met

Disadvantages of a corporation:

• The process of incorporation requires more time and money than other business structures.
• Corporations are monitored closely by government agencies, and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income, so the income can be taxed twice.

Subchapter S Corporations
A tax election only, this option enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to his personal tax return. However, if the shareholder is working for the company and the company makes a profit, he must pay himself wages at a level that meets standards of "reasonable compensation." This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do pay yourself, the IRS can reclassify all earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests. 

References:
• Small Business Administration

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