It can be risky to choose a business structure, such as a sole proprietorship or a general partnership, that does not offer limited liability. Without it, you may have to use personal assets to pay off business debts.
Corporations and limited liability companies are two business structures that provide limited liability. The U.S. Small Business Association describes the differences between the two so you can choose one that is most appropriate for your company.
Incorporating a business makes it a separate legal entity from its owner(s). If you own a corporation, its separate legal status provides limited liability that protects your personal assets. If you incur business debts, only business assets can go toward paying them.
The biggest downside of a corporation is that, depending on its structure, you may have to pay income taxes on the company’s behalf and then pay taxes again on the profits you made as the owner of the corporation on your personal income taxes.
Limited liability company
An LLC is sort of a hybrid of a corporation and a sole proprietorship. As the owner of an LLC, you do not have to pay any corporate taxes. You still have to pay self-employment taxes, but because of the pass-through, there is no double taxation. At the same time, an LLC protects your personal assets by providing limited liability.
Each type of business structure offers its own advantages and disadvantages. You should consider these carefully before choosing a structure and starting the business because, in some cases, it is difficult or impossible to change the structure later.