Determining what legal form your business should take is one of the first questions you have to answer when starting your business. There is no right or wrong answer. The key is to understand the available options and determine what best fits your needs.

There are four main ways that you can organize your business:

• Sole proprietorship
• Partnership
• Corporation
• Limited Liability Company

Each has its own set of advantages and disadvantages.

SOLE PROPRIETORSHIP
A sole proprietorship is a business which is owned wholly and completely by a single individual. That individual is solely responsible for all aspects of the business and is personally liable for all debts, even those in excess of the amount invested in the business. The advantages of a sole proprietorship include:

• Low organizational and administrative costs
• Greatest freedom from government regulation
• Possible tax advantages (taxation of owner at his/her individual rate, owner may deduct losses from his/her own individual return)
• Minimal working capital

The disadvantages include:

• Unlimited liability
• Difficulty in raising capital (must use own money or borrow)

PARTNERSHIP
A partnership is a business jointly owned by two or more individuals. Each of the individuals is personally liable for the debts of the partnership. In some respects, the law treats a partnership as a legal entity, but in others, it does not. The rights and privileges of the partners and the partnership are defined by law and the partnership agreement.

The advantages to a partnership are similar to a sole proprietorship. One additional benefit is that a partnership allows for additional capital and management resources since more than one person is contributing to the company. In addition to the disadvantages of a sole proprietorship, a partnership also has the issue of divided authority.

CORPORATION
A corporation is a separate legal entity that acts as a single person and is created under statutory law. The corporation owns the business and, in turn, the corporation issues shares of stock to individuals investing in the corporation.

Corporations deliver two huge benefits to business owners. One benefit is a legal benefit and the other is a tax benefit.

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