What type of business should I set up?

The four basic choices you have for how to organize your business are:

1. Sole proprietorships.

2. Partnerships.

3. Corporations.

4. Limited liability companies (LLCs).



There is obviously a lot that goes into your decision based on the pros and cons of each business type as well as the circumstances of your particular situation. In addition, you may want to meet with an attorney and/or a tax professional, as the legal and financial ramifications of each business entity may ultimately dictate which way you go.

For many people, the best initial choice is a sole proprietorship or a partnership, because these are relatively cheap and easy to setup, and they are also relatively easy to maintain. But if business liability is a concern, a corporation or limited liability company may be more attractive to you, as they generally provide you with more protection against personal liability.

For more information, please review the QuizLaw sections for each of these business types.


What is a sole proprietorship?

A sole proprietorship is one of the four general ways you can choose to organize your business (the other three being as a partnership, as a corporation or as a limited liability company). Unlike the other three business forms, sole proprietorships are not a separate legal entity - they are indivisible from their owner and, as far as the law is concerned, the business and its owner are one in the same. As a result, sole proprietorships are the easiest and cheapest type of business to setup and operate. However, this also means that the owner is fully responsible for the company and there is no form of limited liability - so if the business gets sued or defaults on some debt, the owner is always on the hook for that liability.

If you are setting up a sole proprietorship, you must be the only owner (except that your spouse can be a co-owner in the company) - if your business is going to have more then one owner, your cheapest and easiest option is generally to start a partnership. As for running the sole proprietorship, you can choose to run it under your own name, or create a fictitious name to use for the business (and generally, in most states, you will have to make a fictitious name filing with the relevant state entity).

If you choose to start your business as a sole proprietorship, you can always change its form to a more complex form (like a partnership or an LLC) later, if you a need to do so arises.


What is a partnership?

A partnership is one of the four general ways you can choose to organize your business (the other three being as a sole proprietorship, as a corporation or as a limited liability company). A partnership is the default business organization for two or more people - in other words, if two or more people start a business together and do not specifically set it up as a formal corporation or LLC, it is automatically a partnership. While this suggests that partnerships are very easy to setup, there are some basic steps which you should follow, such as preparing a written partnership agreement. Even so, partnerships are significantly cheaper and easier to set up than a corporation or LLC, and they are also generally cheaper and easier to control and operate. Thus, partnerships are the simplest business form for multiple co-owners to set their business up as (since a sole proprietorship cannot generally have more than one owner).

As with a sole proprietorship, the owners of a partnership are not generally afforded any liability protection, meaning they are personally liable for any losses, debts or judgments of the partnership itself. Most partnership are general partnership, where all partners have the ability to control and manage the partnership, which means that all of the owner-partners have personal liability risks. Some partnerships instead opt to be run as a limited partnership, which means that some of the partners are only investors (e.g., silent partners) with no control over the partnership - this lack of control affords these limited partners some of the same limited liability protections offered to the owners of corporations and LLCs.


What is a corporation?

A corporation is one of the four general ways you can choose to organize your business (the other three being as a sole proprietorship, as a partnership or as a limited liability company). Like partnerships and limited liability companies, a corporation is a separate legal entity from its owners, and it can live beyond the life of any of the individual owners. Corporate owners are known as shareholders. Many times a corporation is not run or controlled by its shareholders. Instead, the corporate directors manage the corporation and the officers operate it on a day- to-day basis (of course, the role of shareholders, directors and officers can often be mixed, and for small corporations, there may just be one or more shareholders who also run and control the company).

One of the major advantages to the corporate form is that it offers protection to its owners in the form of limited liability, meaning the owners are not personally liable for losses, debts and obligations of the business itself. Corporations are also useful for raising money and capital, as they can sell shares of stock, allowing investors to become partial owners. Of course, running your business as a corporation also has certain disadvantageous, particularly the fact that the law is more controlling of corporations, requiring various formalities to be strictly followed.

It should be noted that many state laws do not allow certain organized professionals to run their business as a corporation (or, for that matter, as an LLC). For example, in many states, lawyers or doctors can not join together in a corporation because the state has decided that these professionals should not be entitled to the strict limited liability afforded to corporate owners. In such states, these professionals will often form a limited liability partnership instead, as this is the most protection they can obtain when not permitted to form a corporation or LLC.


What is a limited liability company?

A limited liability company, typically referred to as an LLC, is one of the four general ways you can choose to organize your business (the other three being as a sole proprietorship, as a partnership or as a corporation). LLCs are a newer type of business entity, as most states did not have laws recognizing the LLC form until the 1980’s. Over the last few decades, however, LLCs have become very popular due to the fact that they combine some of the most attractive features of both partnerships and corporations. Specifically, LLCs afford their owners the same type of limited liability associated with corporations, meaning that LLC owners are not generally personally liable for the business’ debts and losses. However, compared to corporations, LLCs are relatively easy to set up and the LLC form provides more flexibility than the corporate form - in this regard, LLCs are more akin to partnerships.

It should be noted that many state laws do not allow certain organized professionals to run their business as an LLC (or, for that matter, as a corporation). For example, in many states lawyers or doctors can not join together in an LLC because the state has decided that these professionals should not be entitled to the strict limited liability afforded to LLC owners. In such states, these professionals will often form a limited liability partnership instead, as this is the most protection they can obtain when not permitted to form an LLC or a corporation.



The easiest and cheapest type of business to set up is a sole proprietorship. There are very few complications or formalities that you need to worry about following and the associated fees are fairly low. Partnerships are only slightly more complicated and expensive, but still relatively easy for anyone to setup. Corporations and LLCs take considerable more time and expense to setup, but are worth it if you need limited liability or are going to need significant investment/start-up funding.

What is a business plan?

A business plan is simply a written document which outlines your business idea, explaining what you want to do and how you are going to do it. You are free to put this together in whatever format you would like and to include whatever information you think is important. However, it should generally include some basic information such as a description of the business, a description of your related business experience and achievements, predictions of how the business will do in terms of sales and profits and an explanation of what you intend to use your startup capital for.