What’s the best way to start a business—and how do sole proprietorships, partnerships, and corporations really differ?
Clients often ask what is the best way to start a business and what are the real differences between a sole proprietor, partnership, and corporation. Each structure has its own advantages and trade-offs. The right choice depends on your goals, the nature of your business, and your tolerance for risk.
Sole Proprietorship
A sole proprietorship is the simplest way to carry on business – you and the business are legally the same. It’s inexpensive to set up, and all profits flow directly to you. The downside? Unlimited personal liability. That means if the business can’t pay its debts or faces a lawsuit, your personal assets (like your home or savings) may be at risk.
From a tax standpoint, all business income is reported on your personal tax return. Many small or seasonal businesses start this way.
Partnership
A partnership exists when two or more people carry on business together with a view to profit. Partnerships can be general, limited, or limited liability (LLP).
They’re relatively easy and inexpensive to form. However, partners in a general partnership share responsibility for the business debts and obligations. A limited partnership allows some partners to cap or limit their liability to the amount of their investment, while LLPs (commonly used by professionals) protect each partner from personal liability for another partner’s negligence. Partnership income is allocated among the partners and reported personally, avoiding corporate tax but still exposing the partners to personal risk unless limited liability protection applies.
Corporation
A corporation is a separate legal entity, it can own property, incur debts, and enter into contracts in its own name. The key benefit is limited liability: shareholders are generally only at risk for what they’ve invested.
Corporations also have continuity (they survive changes in ownership) and flexibility in ownership through different share classes. They can make raising capital or bringing in investment easier and offer strategic tax advantages when profits are retained or paid out over time. That said, incorporation comes with setup and ongoing compliance costs, and corporate income is taxed separately from your personal income.
Choosing the Right Structure
There is no one-size-fits-all answer. Your decision depends on factors like the level of risk, number of owners, expected profits, and long-term goals like succession or tax planning.
At Boardwalk Law, we regularly help entrepreneurs and business owners assess their options and choose a structure that strikes the right balance between tax efficiency, liability protection, and practical control. Please contact Brian M. Murphy, Associate Lawyer at [email protected] / 365.747.5687 to book a consultation today.
