Determining Your Business Structure
Whether you’re a one-person design show, a dynamic duo of branding wizards, or building the next big socially conscious agency—your business structure matters. The structure you choose has far reaching implications including liability protection, taxes, how you raise money, and how you grow or exit your business when the time comes. Before doing anything, we highly recommend you get legal advice from a professional, but to get you started, here’s the breakdown, without the boring bits.
Want to take this (really good) information on the go? We’ve condensed it down into a cheat sheet for your convenience.
SOLE PROPRIETORSHIP: FLYING SOLO, BABY!
WHO IT’S FOR: Freelancers, crafty folks testing the waters
You’re the boss, the team, the coffee runner - everything. A sole proprietorship is the easiest set up, but also the riskiest. Legally, you and your business are one, which means if your business gets sued, then you’re the one paying.
PROS:
Perfect for side hustles and low-risk passion projects when flying solo or with your spouse
Dirt cheap and fast to launch
Great if you have an idea and want to test it out before “going big”
CONS:
If the business flops or anything goes wrong, your personal savings and assets will be on the line since you have unlimited personal liability
All the money you get is what you earn, can’t get investors since you don’t have stock or shares to sell
Banks aren’t known for giving loans to sole proprietors, and can be limited on some tax deductions
PARTNERSHIP: CREATIVE TAG TEAM
WHO IT’S FOR: Besties in business or collab superstars building an empire together
It’s like starting a band, but with contracts. You and your business partners split the work, the profits, and of course, the occasional “why did we do this?” existential crisis.
TYPES:
Partnership: Two or more people that agree to share the profits and losses of their business venture
Limited Partnership (LP): One partner runs the show (and takes the legal heat), while other partners back it with cash and stay in the background behind their investment
Limited Liability Partnership (LLP): Everyone’s got protection and skin in the game, without risking their life savings
PROS:
Easy set up = fast launch
Ideal for duos and groups testing a business idea without diving all the way in
Get the super powers of each partner in the business
CONS:
In Limited Partnerships, the “lead” partner is on the hook financially and has to pay self-employment taxes (like Social Security and Medicare)
The partnership (both LP and LLP) doesn’t pay corporate taxes - instead, each partner reports their share of the income, deductions, and credits on their personal return
Resolving partnership disagreements and disputes, or one person exiting the company, may get tricky if not initially addressed in a Partnership Agreement
LLC (Limited Liability Company): The Best of Both Worlds
WHO IT’S FOR: Creatives who want legal armor and tax perks.
This is the designer sneaker of business types—stylish and practical. Owners of an LLC, aka “Members,” have more legal protection against personal losses and flexible tax treatment. Win-win.
PROS:
Keeps your house, car, and other assets out of the lawsuit danger zone, i.e. can limit losses to the extent of your business investment.
The LLC doesn’t pay corporate tax, the profits will flow through your personal return. This can save you money and is easier.
Looks legit to clients and partners.
CONS:
You’re self-employed, so you have to pay extra taxes for things like Medicare and Social Security.
Without a clear (and legal) exit plan, you might need to dissolve and restart if a member leaves the business.
“Members” do have unlimited liability due to their ownership; but contrary to popular understanding, they could still have personal liability if they were personally involved in the actions at issue in the lawsuit.
C Corporation: Big Biz Energy
WHO IT’S FOR: Ambitious creatives with dreams of funding rounds, scaling, and maybe going public.
This is your “go big or go home” option. The business is its own legal entity - it pays taxes, takes hits, and keeps on rolling, even if you sell your shares or peace out.
PROS:
Best legal protection around - your personal stuff is protected from most business losses.
Raise money like a pro by selling shares to investors
Built to scale - you want to go big!
CONS:
The paperwork, rules, reporting and compliance is plentiful!
The business gets taxed twice: once when it makes a profit, and again when it pays you (and other owners) a share of that profit, called dividends.
S Corporation: Small Business, Big Tax Breaks
WHO IT’S FOR: Creatives who want C Corp protection without the IRS headaches.
Like a C Corp, but tax-savvy. You don’t get hit with double taxation. Plus, you can get a paycheck and distributions (which might be taxed less).
PROS:
Tax efficient and no double taxes. The business itself doesn’t pay income tax. Instead, the profits (or losses) go straight to your personal tax return, which usually means less taxes overall.
You still get legal protections, so that your personal stuff is not exposed to most business losses.
You can pay yourself a salary and then take additional money from the business as a distribution, which may be taxed at a lower rate than regular income.
CONS:
You have to follow some strict rules: for example, you can only have up to 100 owners, and they must be U.S. citizens or residents (no corporate or international investors allowed).
The IRS watches S Corps closely to make sure owners are paying themselves a “reasonable salary”—you can’t just skip it, or lowball it, to dodge taxes.
To keep things simple, it only allows “One Class” of shares and profits must be allocated according to shares owned.
Extra Credit: You can be a B Corp, aka a Social Purpose Corporation
If you want to make money and make a difference, you can legally register as a B Corp and be certified by B Lab. This takes extra work on the front end and in regular reporting; but by writing both “doing good” and “making money” into your official business purpose, you are no longer bound to “only” maximize gains for your shareholders.
Keep in mind this document is a starting point. It’s not exhaustive in the details and it’s important you fully understand all the legal implications of each entity structure before making your decision. Before you make any decisions, you should talk with a lawyer and/or CPA.
