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The kind of business entity you choose to use – whether sole proprietorship, a general partnership, LLP, corporation, or limited liability company – will impact your legal protection from lawsuits and business debts. It also affects how your company will be taxed and the amount of paperwork you have to file. The type of business entity you choose can affect your ability to secure a small-business loan and your ability to draw investors.

State governments recognize more than dozen kinds of entities, most small-business owners will register as one of six types: sole proprietorship, general partnership, limited liability partnership or limited liability company, S corporation or C corporation. To establish your company’s structure, you must file the proper paperwork with your state agency and pay a modest fee in most states.

The type of entity you select is among the first major choices you’ll make as a brand new business owner. The choice you make will have a significant impact on your legal responsibilities and financial position, so it’s a good idea to work with business lawyers and accountants for advice specific to your business.

An LLC, for instance is a well-liked business entity for self-employed persons because it offers the tax advantages and liabilities of both a limited partnership or a corporation. It permits flexibility in how the company is managed as well as its size, method of ownership, as well as the kinds of owners or investors. It also follows an income tax system that is pass-through, which means that profits are declared and incorporated into the members’ gross income. They are then responsible for taxation on these profits.