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Business Resources

Determining the Legal Structure of Your Business

Young Business Woman with iPad Sitting at DeskYou're ready to establish your business - congratulations! One of the first important decisions you'll need to make is how you want to structure your business.  

Many things are determined by the legal structure of your business. The things to consider are:

  • Tax implications
  • Legal liability
  • Expense of starting the business and ongoing administration
  • Future needs of the business including the addition of new owners and ability to issue stock

We've put together information on each type of business structure to help you make the right decision for your business needs. 

Sole Proprietorship

The simplest to form of the business structures, a sole proprietorship generally has just one owner, who is personally liable for the business. This means that the owner is responsible for any business debt and their personal assets can be seized if debts are not paid. The owner declares any income from the business on their personal taxes.


Similar to a sole proprietor, the owners of a partnership business are held liable for the business. The difference is that there can be more than one owner. The benefit of creating a partnership is having a blend of expertise and also splitting the risk with another person. A partnership can be easily formed without formal agreements, but it is suggested that a partnership agreement that clearly defines how profits are divided, is created. 

C Corporation

Most large businesses register as C Corporations. In the case of a C Corp, owners are not personally liable and the business operates legally separate from owners. Because of this, registering for a C Corporation can be costly and complicated. Many people do this to minimize risk and liability. Subject to double taxation, as the company must pay taxes on profits, as well as the owners. Must abide by state corporate law. 

S Corporation

Designed for small businesses, an S corporation shields owners from legal liability, but are not subject to the same double taxation that C Corporations are. This benefit comes with a high legal and tax cost. There are limits to the number of shareholders and must stay within specified guidelines to qualify. Because of this, there tends to be a higher legal cost to an S Corp. 

Limited Liability Company (LLC)

Considered a mix between a corporation and a partnership, an LLC is considered the most tax-effective option. An LLC can have one or several owners and those owners have limited legal liability, like a corporation. A single-owner LLC is not subject to double taxation as the owner files the business income on his or her personal tax return.  

Here is a brief summary of what to expect with each structure:

Business Structures Sole Proprietor Partnership C Corp S Corp LLC
Difficult to set up? No No Yes Yes  No
Expensive to register? No No Yes Yes Maybe 
Legal liability on owner? Yes Yes No No Some
Owner pays the taxes? Yes Yes No No Yes
Change legal structure easily? Yes No No No No

The Small Business Administration has more resources to help you determine the correct structure for your small business. You may also speak with a tax advisor for additional direction. 

If you have further questions, our Business Advocates are here to help. Give us a call at 503.626.6600 or 800.452.8502.

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Did you Know?

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