How to Choose a Business Structure for Your New Business

How to choose a business structure and register your new business

"How to Choose a Business Structure and Register Your New Business" is part of my ongoing Business 101 series for women (and others) looking to start their first business or a new business. See the other existing articles here. Posts may contain affiliate links to products or services I personally use and believe are valuable for people reading my site. These links help provide revenue to run my site at no extra cost to you. You can learn more by reading my disclaimer.So you’ve brainstormed names, checked them against trademarks and existing business entities, and finally landed on a name for your business. The next step is learning how to set up your business, and what different business structures mean. First, let me say that although these technical steps might seem confusing or feel overwhelming (I know I sure felt overwhelmed, at first), there aren’t as many choices as you might think. To put it another way, all of this information is leading you to one choice, one business structure, and it’s not so much a matter of choosing your structure as seeing where you fit and following those directions. It’s kind of like trying on a dress. You don’t choose a size from every size available–one size fits better than all the rest. It’s all a matter of just going through the steps to find the perfect fit. So let’s dive in. 

There are five main business structures: 

• Sole Proprietorship 
• Limited Liability Company (LLC) 
• Partnership
• Corporation
• S Corporation

Each business structure has its own benefits and drawbacks. I’ll define each one below, but the three that are most likely relevant to you are Sole Proprietorships, LLCs and possibly Partnerships. Feel free to skip over any sections that don’t apply to you. 

business structure 1: sole proprietorship

This is the most common business structure. As the name implies, a Sole Proprietorship means that one person owns and operates the business. For example, a freelance writer could have a Sole Proprietorship. Or a certified public accountant who does your taxes, a website designer, a home organizer, etc.In a Sole Proprietorship, the owner is responsible and liable for all of the business’s debts and liabilities. That means if something goes wrong and your business gets sued, you’re getting sued. In the eyes of the law, you and your business are one and the same, so unlike other business structures, a Sole Proprietorship offers no legal protection distinguishing between your private assets (your car, home, savings) and your business assets. 

Okay, so why is it the most common type of business structure?

Because you don’t have to do much to establish one. If you work under your own name, you don’t have to file anything at all. If you work under There’s nothing to file to set up, there are no annual filings with the state to stay current, and there are no government fees.Not having to register with the state protects your privacy more than other business structure types. Additionally, your business taxes just get folded into your individual tax return, which keeps things simple. You can also set up an Employer Identification Number (EIN), which gives you the ability to open a business bank account, among other things.However, as a Sole Proprietor, you have the ability to do 100% of your business under your social security number. You just won’t have access to a separate business checking or savings account, or credit card. Filing for an EIN is free through the IRS website.(Don’t fall for a stupid almost-scam like I did and pay someone $250 for the privilege of getting a free EIN.)

Sole Proprietorships are great if your single-person business is low risk and uncomplicated.

For example, it would be perfect for people who provide house cleaning, bookkeeping, freelance writing or design, tutors, virtual assistants, hair stylists, etc. They’re not likely to hurt someone or cause irreparable damage, which puts them at lower risk of being sued. You can technically hire employees as a Sole Proprietorship, but you’ll be responsible for protecting not just your business, but your personal assets as well. 

A Sole Proprietorship may be a good business structure for you if:

• You’re the only employee at your company
• You just want to get your company up and running cheaply before converting to another business structure 
• You don’t mind folding your business taxes into your personal tax return 
• Your work is at a lower risk of lawsuits
• You value your privacy
• You don’t want to file articles of incorporation with the state

business structure 2: LIMITED LIABILITY COMPANY

If a Sole Proprietorship’s weakness is that you could lose your personal property in a lawsuit, then you’ll understand why LLCs exist. A Limited Liability Company is an independent entity, so if you’re sued or your company goes bankrupt, your personal assets are protected. Only your business assets would be up for grabs.Like a Sole Proprietorship, an LLC can also just be one person pulling all the strings, or an owner with employees. You can also file your business taxes with your individual taxes if you’re a single-member LLC, but just the act of having LLC generally confers more credibility with customers or clients.Also, you can hire your spouse to work within your company and still qualify as a single-member LLC. That can be advantageous for your taxes, allowing you to keep more money as wages within your family, as well as set more money aside in tax-sheltered retirement savings for both you and your spouse. (Which would further reduce the amount of taxes you would owe.)

To set up an LLC, you’ll need to file paperwork with your state.

The fees for setting up an LLC and filing annual paperwork varies widely from state to state. For example, in Michigan, setting up an LLC costs $50 through the state, with a yearly fee of $25. But in Massachusetts, setting up an LLC costs $500, with another $500 fee accompanying the annual filing. Most states are nowhere near that much, but taking the cost of filing and maintaining an LLC in your state may sway your choice. If you'd prefer the peace of mind and convenience of having someone file your LLC paperwork for you, I recommend Nolo's LLC Packages, which start at just $49. They'll help you validate your preferred business name, create your articles of organization and they've got great customer service ready to answer all your questions. I had help setting up my own LLC, and while it's not a requirement (you can definitely do it yourself), if you have the money to spare, it does simplify the process.

You're able to get an EIN for your company, which unlocks access to more business resources.

For example, opening a business bank account will typically require an EIN, but allows you to keep your business income and spending separate from your personal accounts.Like a Sole Proprietorship, you don’t strictly need an EIN if you’re a single-member LLC. Technically, your Social Security Number is all you need to get paid and file your taxes. But banks do generally require an EIN to access their business resources, so you may choose to get one. Filing for an EIN is free through the IRS website.(Don’t fall for a stupid almost-scam like I did and pay someone $250 for the privilege of getting a free EIN. Yeah, I'm gonna keep saying it in case people are skimming...)Ultimately, an LLC can overlap a lot with a Sole Proprietorship, but it comes with a few more responsibilities and a lot more benefits.

An LLC may be a good business structure for you if: 

• Your work is higher risk or you have personal assets you want to protect 
• You’re plan to hire family members or a small team in the future 
• You want the tax and saving advantages of an LLC
• You want to keep your business and personal finances separate
• You want access to a wider range of business resources
• You don’t mind paying fees to set up and maintain your LLC

business structure 3: partnerships

Partnerships are a business structure available if your business will be owned by two or more people. Partnerships come in two kinds – General Partnerships, where all the owners are equally invested and equally responsible for business liabilities, and Limited Partnerships, which can include general partners as above, but may also include limited partners, like investors, who have limited input into the running of the company but also carry very little or no liability. So if a Limited Partnership gets sued, the limited partners/investors personal assets are not up for grabs. 

A partnership is the easiest structure to set up with two or more people.

It’s simple to set up – you may not even need to file paperwork with the state, depending on your name. Also, like an LLC and Sole Proprietorship, profits and losses pass through to the owners’ personal tax returns. Having a partner can make running a business easier. For one, you split the cost of starting a business, and banks may be more likely to offer loans to businesses with partners. If you plan on having formal investors in your company (rather than, say, having Aunt Rita loan you a few hundred bucks to get started), you’ll need to establish a partnership.Like an LLC, a Partnership also allows you to get an EIN, hire employees, and put money aside in retirement savings (unlike a Sole Proprietorship). You’ll need to pay to file your Partnership with the state, and it’s a good idea to draft and sign a partnership agreement.

You may want to hire a lawyer for this.

Contracts are always a good idea, particularly if you’re forming a business with friends. Why? Friends with any kind of history tend to bring their own assumptions into any situation, whereas starting a business with a near stranger means you’d have to explicitly discuss all the little details anyway.So just do yourself a favor, explicitly discuss all those little details anyway, like how much each person contributes, the allocation of profits and losses, how to admit new partners down the road – and protect yourself with a contract. Don’t just assume because you’ve known someone for a long time, you can skip this step. (Please don't skip this step.)

A Partnership may be right for you if: 

• You’re opening a business with one or more partners (required)
• Your work is higher risk or you have personal assets you want to protect 
• You want the tax and saving advantages of a Partnership 
• You want to keep your business and personal finances separate
• You want access to a business bank account or credit cards
• You don’t mind paying fees to set up and maintain your Partnership

Just by being here, I’ll hazard a guess that you’re not looking to set up a Corporation of any kind, as they have a totally different set of rules and regulations.

Did you know that 90% of women-owned businesses have no employees other than the owner (PDF alert)? 

That means most of you will be setting up Sole Proprietorship or LLCs – which simplifies things a great deal. By now, I hope it’s clear which structure will work best for you. Although Sole Proprietorships and LLCs have different benefits, they’re very similar. But if you’re still stuck, or you’re waffling, or you’re just unsure, let me break it down even more. (Obviously, this is just my opinion.)

business structure cheat sheet:

* If you’re broke right now and just want to get started, go with a Sole Proprietorship.

* If you can afford the fees, start an LLC.

* If you're starting a business with a friend, choose a Partnership.

The benefits and services afforded LLCs make them not just a safer choice (against lawsuits), but a more practical one, as you’ll seem more legitimate, have access to more financial services, be able to take advantage of more tax advantages, and you won’t be personally liable for business debts. And Partnerships are self-explanatory. If you're forming a business with another person, this is the way to go.

“Okay, all of this is great,” you’re thinking, “but WTF do I actually need to DO?”

Babes, I’m so glad you asked. Let’s break it down even more with a step-by-step checklist of all the steps you need to do to set up your business. Note: The checklists below assume you are a single-member business, like the 90% of all women-owned businesses, or a simple partnership. If you plan on having employees right away, you’ll need to add steps for hiring, setting up payroll, and securing more insurance if necessary.

how to set up a sole proprietorship business structure

1. Choose a business name. This could be your own name or one you make up.
2. If you work under a name you make up, file your business under “Doing Business As” with your state. This may also be called an assumed name certificate.
3. If you’ll work under your own name, there’s no need to file anything with the state. This is the most common way people start Sole Proprietorships.
4. Research and obtain any federal, state and local business licenses you may need. It’s a good idea to Google this even if you don’t think you need a license–although the federal and state governments may not require one, your local city may, even if you work from your home.For example, even self-published romance authors need a general business permit in many cities across the country, which surprised me. Double check just to be sure.
5. If you’ll be selling goods and collecting sales tax, register with your state taxing authority. If you offer a service, check with your state. Some states automatically tax all services, some states don’t tax any services, and most tax some services but not others.
6. (Optional) File to receive an EIN with the IRS.
7. (Optional) Open a business bank account.
8. Research and secure any additional insurance you may want or need for your business. (Other than your home or renter's insurance, etc.
   1. Look into general liability insurance, product liability insurance, professional liability insurance, commercial property insurance, home-based business insurance or a business owner’s policy (which typically bundles policies you may want).
   2. Two questions can help you decide whether you need insurance: 1. Do I have business property I can’t afford to replace out of pocket? For example, if you run your business exclusively off an old laptop, you could probably find the money to buy a new or refurbished one. But if you’ve put a lot of money into inventory or materials, you’ll want to make sure you have insurance coverage.
   3. 2. Is it likely I could get sued for a lot of money? For someone like a freelance writer or graphic designer, a big lawsuit is unlikely. If you’re a hairstylist and someone trips and falls into a pair of scissors while at an appointment with you, you’ll wish you’d bought insurance–even if the accident wasn’t your fault.
9. (Yearly) File your business taxes with your personal tax return. The form you’ll need is a Schedule C, also called “Profit or Loss From Business.”
10. Even if your expenses are low or infrequent, I recommend keeping a spreadsheet tracking each expense and updating it monthly. You don’t need to submit receipts with your tax return, but it’s a good idea to keep these on hand as well, on the off chance you get audited. Paying for all your business expenses out of your business bank account can also make it easy to keep track of every expense from the month or year.

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how to set up a limited liability company (llc) business structure

Nolo's LLC Packages start at $49 and cover name validation, creating and filing articles of organization and a custom operating agreement, if you'd rather pay a service to handle this for you.

1. Choose a business name. Check against the United States Patent and Trademark Office and your state’s Business Entity Search to ensure no one else is operating under the same name.
2. File your Articles of Organization with your state or through a service like LegalZoom. (They may also be called Certificate of Organization or Certificate of Formation in some states.) You’ll need:
   1. Your desired LLC name
   2. The purpose of your LLC
   3. The name and address of your LLC’s Registered Agent. If you work from your home, this can be you and your home address, but you can also secure a virtual mailbox that will give you a real-world address you can use to protect your privacy, or you can hire someone to act as your Registered Agent through an online service.
   4. Your signature, or the signature of all owners if there are more than one
   5. A card to pay the fee when you file online
3. Although most states don’t require it, you may want to create an Operating Agreement, especially if you’re not the only member of your LLC, or if you plan on having employees at any point. Experts recommend that you have this signed and notarized to help further solidify your status as an LLC.
4. Research and obtain any federal, state and local business licenses you may need. It’s a good idea to Google this even if you don’t think you need a license–although the federal and state governments may not require one, your local city may, even if you work from your home. For example, even self-published romance authors need a general business permit in many cities across the country, which surprised me. Double check just to be sure.
5. If you’ll be selling goods and collecting sales tax, register with your state taxing authority. If you offer a service, check with your state. Some states automatically tax all services, some states don’t tax any services, and most tax some services but not others.
6. Apply for an EIN with the IRS. This number is free–but there are lots of businesses eager to convince you to pay them to do this step for you. Younger self–you do not need to pay $250 for this. Smh.
7. Once you have your EIN and Articles of Organization, apply for a business bank account. You should be able to do this online. As an LLC, it’s important to keep your business and personal finances separate.
8. Research and secure any additional insurance you may want or need for your business.
   1. Look into general liability insurance, product liability insurance, professional liability insurance, commercial property insurance, home-based business insurance or a business owner’s policy (which typically bundles policies you may want).
   2. Two questions can help you decide whether you need insurance: 1. Do I have business property I can’t afford to replace out of pocket? For example, if you run your business exclusively off an old laptop, you could probably find the money to buy a new or refurbished one. But if you’ve put a lot of money into inventory or materials, you’ll want to make sure you have insurance coverage.
   3. 2. Is it likely I could get sued for a lot of money? For someone like a freelance writer or graphic designer, a big lawsuit is unlikely. If you’re a hairstylist and someone trips and falls into a pair of scissors while at an appointment with you, you’ll wish you’d bought insurance–even if the accident wasn’t your fault.
9. (Yearly) File your business taxes with your personal tax return. The form you’ll need is a Schedule C, also called “Profit or Loss From Business.”Even if your expenses are low or infrequent, I recommend keeping a spreadsheet tracking each expense and updating it monthly. You don’t need to submit receipts with your tax return, but it’s a good idea to keep these on hand as well, on the off chance you get audited. Paying for all your business expenses out of your business bank account can also make it easy to keep track of every expense from the month or year.
10. (Yearly) File your Annual Report with the state. Most states require LLCs to file an annual report with a filing fee. Check your state’s requirements. In Michigan, this is as simple as verifying that my business is still operating and paying $25 to the state.

how to set up a partnership business structure

Since there are two different forms of Partnerships, this is high-level guidance for General Partnerships, but be sure to cross-reference against your own research.

1. Choose a Partnership name. In many states, you can use either the surnames of the partners (e.g. Sterling Cooper Draper Price) or a fictitious business name (a descriptive name you come up with).If you use a fictitious business name, be sure to check against the United States Patent and Trademark Office and your state’s Business Entity Search to ensure no one else is operating under the same name.
2. If you decide to do business under your own surnames, you may not need to register with the state.
3. If you choose a fictitious name, you will need to register your name with your local county clerk’s office or with your state. Some states and cities will require you to publish a statement in your local newspaper for a period of time, such as once a week for 4 weeks, to provide publicly available transparency about who owns your company.
4. Create and sign a Partnership Agreement. This isn’t legally mandatory, but it’s 100% a best practice. Why? Because it can help you avoid misunderstandings, arguments, and legal battles between partners by ironing out a lot of details ahead of time. Like an Operating Agreement for an LLC, ideally you would have this printed and notarized, although this is also a best practice, not a requirement. Your Partnership Agreement might include:
   1. What each partner contributes to the partnership (e.g., 50/50 or 60/40 input of financing, X hours a week of work)
   2. How you allocate profits, losses and draws (e.g. 50/50 profits split, when and how much you’ll draw from your business accounts)
   3. Who will have authority over what, who will manage what
   4. How you’ll vote on any decisions, how you’ll break a tie
   5. The process for admitting new partners down the road
   6. What happens if you go bankrupt, a partner dies, or a partner wants to leave the business and cash out
5. Research and secure any additional insurance you may want or need for your business.
   • Look into general liability insurance, product liability insurance, professional liability insurance, commercial property insurance, home-based business insurance or a business owner’s policy (which typically bundles policies you may want).
   • Two questions can help you decide whether you need insurance: 1. Do I have business property I can’t afford to replace out of pocket? For example, if you run your business exclusively off an old laptop, you could probably find the money to buy a new or refurbished one. But if you’ve put a lot of money into inventory or materials, you’ll want to make sure you have insurance coverage.
   • 2. Is it likely I could get sued for a lot of money? For someone like a freelance writer or graphic designer who works alone and from home, a big lawsuit is unlikely. If you’re a hairstylist and someone trips and falls into a pair of scissors while they’re in the space where you conduct your business, you’ll wish you’d bought insurance–even if the accident wasn’t your fault.
6. Once you have your EIN, apply for a business bank account. You should be able to do this online. It’s important to keep your business and personal finances separate for record keeping and transparency in your partnership.
7. (Yearly) File your business taxes with your personal tax return. The forms you’ll need are Form 1065, also called “US Return of Partnership Income,” and Schedule K-1 (Form 1065) , or “Partner’s Share of Income, Deductions, Credits, etc.”Even if your expenses are low or infrequent, I recommend keeping a spreadsheet tracking each expense and updating it monthly.You don’t need to submit receipts with your tax return, but it’s a good idea to keep these on hand as well, on the off chance you get audited.Paying for all your business expenses out of your business bank account can also make it easy to keep track of every expense from the month or year.

And honestly? That's it. (That's the tweet.)

The process of starting your own business can feel really overwhelming.

That's how I wound up paying $250 for a free EIN. I was applying for a business bank account one day with my LLC Articles of Organization in hand, and the bank required an EIN. I put in my Social Security Number, thinking that would suffice, but I got a phone call from the bank saying I needed a true EIN, and they were going to cancel out the application so I could submit a new one that day. And in my rush, I searched for "Get an EIN" and clicked on the first result that looked legitimate. I didn't even realize that I could get an EIN for free until weeks later when another female business owner I trust mentioned it. And wow, did I feel foolish. 

So don't let feeling overwhelmed or rushed affect your decisions here, friends. 

Hopefully, seeing all these steps laid out methodically with references is enough to give you confidence. After all, think of all the crappy small businesses you may have crossed paths with in your life — contractors who don't show up when they say they will, local businesses whose phone numbers on their sites are disconnected, etc. 

If they could navigate this stuff, so can you. I believe in you. 

And of course, because this starting a business is a complex process with multiple steps, be sure to pin this post to your Pinterest. Not only does it help me out, but you'll always know right where to find this reference in the future. Still have lingering questions or looking for clarification? Leave me a comment below and let me know how I can help. Like this post?Save it to Pinterest!

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