Why business structure matters
When entrepreneurs develop a business idea, it’s natural to want to jump in and get started. But like so many aspects of developing a business, the wisest among them also plan ahead, choosing the structure that best fits their business operations and goals, both now and in the future.
The pros and cons of common business structures
Sole proprietorship: Simple and flexible, but risky
The sole proprietorship is the easiest business structure to form, manage, and dissolve. It offers complete control and simple taxation, with profits and losses passing directly to the owner’s personal tax return.
But it also leaves owners personally responsible for all business debts and legal claims, thereby putting their personal assets at risk.
Many businesses begin as sole proprietorships by default, simply because the owner didn’t set up anything else.
General partnerships: Shared ownership, shared risk
Like sole proprietorships, general partnerships are easy to form — just two or more people working together without establishing a formal entity.
But they also carry even more liability. Each partner can bind the business financially, and all partners can be held personally responsible for business debts.
Some partnerships evolve into limited liability partnerships to reduce this risk, but other structures often offer better protection.
Corporation: Strong liability protection and formal structure
Corporations are a popular choice for businesses seeking clear legal guidelines, access to outside investment, and strong liability protection.
Corporations feature:
- Defined roles (shareholders, directors, officers)
- Liability shielding
- Multiple tax options, such as C Corp (taxed at the corporate level) and S Corp (where profits pass through to shareholders)
On the downside, corporations come with:
- Higher administrative costs
- Ongoing compliance requirements (e.g., separate bank accounts, annual meetings, reports)
Failing to follow corporate formalities may allow creditors to "pierce the corporate veil," putting personal assets at risk.
An important part of maintaining the integrity of the corporate entity is to ensure that third parties dealing with the business understand they are dealing with a separate entity. The corporate status (e.g., Inc., LLC) should be listed in conjunction with the name of your business wherever it may appear publicly — on business cards, signage, letterhead, ads, websites, customer correspondence, invoices and checks.
Limited Liability Company: The best of both worlds?
LLCs combine many benefits of corporations and partnerships, blending the simplicity and tax benefits of a partnership with the liability protection of a corporation.
LLCs offer a practical balance of protection, control, and flexibility, including:
- Limited liability for members, meaning personal assets are generally protected from business debts and lawsuits.
- Pass-through taxation by default, where profits and losses are reported on the owners’ individual tax returns. (LLCs can choose to be taxed as a corporation if they prefer.)
- Flexible management structure, allowing members to manage the LLC directly or appoint managers.
- Fewer formalities than a corporation. Wisconsin does not require annual meetings or a board of directors for LLCs.
This makes LLCs the most chosen business structure in the United States, particularly for small to mid-sized businesses, professional services, and family-owned companies.
When to revisit your business structure
Choosing the right structure isn’t a one-time decision. As your company grows or pivots, it’s important to reassess whether your current structure still fits your needs.
Major changes that may prompt a review include:
- Expansion into new markets.
- Adding partners or investors.
- Shifts in ownership or business model.
Get professional guidance
Your business structure affects everything from taxes and liability to growth potential. That’s why it’s essential to consult trusted advisors — including your attorney, accountant, banker, and insurance agent — to ensure your structure aligns with your long-term vision.
For more information about corporate structures or to schedule a consultation, call us at (608) 784-5678.