Is Your Business Operating Under the Right Business Structure? 5 Questions You Need to Ask

Is Your Business Operating Under the Right Business Structure? 5 Questions You Need to Ask

by Brette Sember, Esq., April 2016

Whether you are starting a new business or have been operating one for a while, making sure you have your business set up in the best structure possible is important. Many businesses start out as simple sole proprietorships or partnerships, but this may not be the safest and best business structure for you.

What Are My Options?

When considering the legal structure of a business, there are several business structures to choose from.

Sole Proprietorship

This type of company has one owner who makes all the decisions and is financially responsible for everything. Profit and loss are passed through the company to the owner, who reports them on his or her personal income tax return. Thus, the owner bears all the liability of the business.


Similar to a sole proprietorship, a partnership has two owners who share control and liability. They share in profit and loss as well, which is passed through to them.

Limited Liability Company

An LLC allows profits and losses to pass through to the owners, but at the same time it protects the owners from personal responsibility for liability. The company is responsible, not the owners, and the individual assets of the owners—or members, as they are called in an LLC—are protected. An LLC is relatively easy to set up but does require some paperwork.


The most complex business structure, a corporation, is a separate legal entity and is owned by its shareholders. Profit and loss remain with the company, as does all liability. A corporation is the most expensive type of company to set up, with the most hoops to jump through.

Ask yourself the following questions to determine if a change in the legal structure of your business might benefit you.

Are You Better Off Now Than When You Started Your Business?

If you have more assets now than when you started your business, those assets can be at risk if your business is sued. Business structures that are a partnership or sole proprietorship pass all liability through to their owners, so your personal assets are on the line if the company is sued.

A limited liability company or corporation form of structure can help protect your personal assets because the LLC business structure or corporation retain liability.

What Type of Work Does Your Company Do?

If your company does work that carries a lot of risk (construction, working with hazardous materials, etc.), you should consider business types that will ensure all liability remains with the company, such as an LLC or corporation.

However, if you have business insurance or can get it, and the insurance will cover the risk and protect you, changing legal business structures may not be necessary.

Do You Want to Sell Stock?

If you want to sell stock in your company, you need to change your company structure to a corporation, which will allow you to issue and sell stock. Once you can issue stock, you can also provide stock options to employees as a benefit and incentive.

While it's possible to sell membership interests in an LLC and raise capital in other ways for partnerships and sole proprietorships, a corporation allows you to set up a clear structure and plan to sell stock in an organized way.

How Profitable Is Your Business?

If your company has been profitable, there are tax benefits to different business structure types that can help you reduce your tax liability.

If you change the legal structure of a company to a corporation, you can hold some of the profits you make in the corporation itself, where they will be taxed at a lower corporate rate. While this is definitely a benefit of incorporating, the time and costs needed to convert the company to a corporation mean that you probably shouldn't incorporate only for this reason.

It is also important to recognize that there is a double tax on corporations: The corporation is taxed on earnings and the shareholders are taxed on dividends they receive. If you pay salaries to yourself and other owners, that money is a business expense the corporation can deduct, reducing the corporate tax.

Choosing your type of business structure is an important decision that impacts many aspects of your business. Be sure to consider all the options before implementing the one that will work best for you and your business. 

If you want to convert to a different business structure, LegalZoom can help. Complete our simple questionnaire to get started. We will create your Certificate of Conversion and file it with the state, and you'll receive a confirmation of the filing.