A limited liability company is the most popular structure for small business owners. The main reasons for that are some of the concerns you may have found in the above scenarios.

An LLC is extremely versatile in almost every way. First, ownership (referred to as membership) has almost no restrictions. It can include individuals, partnerships, other LLCs or even corporations. The members decide amongst themselves who will own what percentage of the business, who will run the business, and how the business will be run.

An LLC can choose its tax designation as well. Generally, an LLC is initially taxed exactly the same as a sole proprietor or general partnership, but has the option to elect to be taxed a c-corp or an s-corp (see your tax advisor for advice on your situation). This is a pretty obvious advantage as the tax designation can change as the business grows allowing the members to take advantage of the tax law to best suit their needs.

Perhaps the most important advantage of an LLC is the limits of liability to the members. An LLC, unlike an SP, is its own entity, separate from the owner or owners. It is responsible for its own debts and liabilities. This means that if an LLC is sued, the plaintiff can generally only sue for the assets of the business, NOT the personal assets of the members or employees. This is a HUGE weight off most new business owners minds when starting a new business.

Corporations are the most complex structure. They generally require a board of directors, officers and shareholders. Although some states do allow a single person to perform all of these roles, many states still require 3 different individuals to make up a board of directors.

In a corporation, the shareholders own the company. Shares can be issued in many ways, but the two most common are virtual shares (more common in small businesses) or stock certificates (very common in larger corporations and universal in publicly traded corporations). Shareholders generally elect the board members who make the larger decisions of the company. And the board appoints (or hires) the officers who run the day to day operations of the company.

A corporation can be taxed (generally) in 2 ways, as a C-corp or an S-corp. Depending on the size of the business, the actual revenue generated, and how that revenue is dispersed, a corporation may choose one or the other, although most if not all publicly traded corporations are required to be taxed as C-corps. We recommend you speak to your tax professional to determine what is appropriate for you.

The liability in a corporation (or lack thereof) is often one of its biggest advantages. The shareholders hold almost no liability, other than the stock price going to zero, as they are treated as no more than investors. The members of the board are generally not personally liable for the activity of the business, nor are the officers (although there are notable exceptions especially if decisions were made knowingly breaking Federal or State law).

The advantages of a corporation are often outweighed by the complexity, especially when most of them can be attained with an LLC, but every situation is different. Corporations also tend to be slightly more expensive to start and maintain as far as registrations are concerned.

Nonprofits vary widely by state as far as complexity is concerned. Many states do require a board of directors, often at least 3 directors, and some require certain language to register. There is also the federal designation of a tax exempt entity to consider.

Nonprofits generally exist for one of two reasons, to benefit the general public (eg. a charity or church) or to benefit the members (eg. A homeowners association or youth sports team). The federal government has very specific requirements to become tax exempt, and the forms go beyond just the state registration and an EIN. Generally, a CPA or attorney should be consulted once the initial creation is complete or even before.

The most basic form of all the business structures is the Sole Proprietorship. In an SP, one person not only owns the business, but IS the business. That person makes all the decisions, gets all the proceeds, usually does most if not all of the work, and also takes on all the responsibility and liability of the business.

We say that the owner IS the business, and the business IS the owner. There is no separation between the two. Whatever happens to one, happens to both, because they are the same entity. The legal name of the SP is the legal name of the owner (Jim Smith for example), and often a trade name (or assumed business name, fictitious name or DBA) is registered so the business can advertise, take payments and open accounts in a name other than their own personal name.

An SP can use their social security number for business purposes (unless they have employees), but most commonly choose to get an EIN for their business use. All income attributed to that EIN is passed directly through to the owners social security number for taxation purposes, and the owner is responsible for all taxes due.

An SP is also personally liable for the activities of the business. Should the business be sued, the owner is being sued personally, and his/her personal assets (think your home, your car, your savings) are at risk should you lose the lawsuit.

A general partnership is very similar to a sole proprietorship, other than obviously having more than one owner. GPs in most states can operate without registration using just the legal names of the partners, but generally will register a business name just like an SP.

Taxes are similar to an SP as well although ensuring all the right documents are submitted with filing can be complex (we always recommend speaking to a tax professional about business taxes). All the income must be attributed to the partners when taxes are filed. The income is based on whatever the partners agree to their portion of ownership of the company, often referred to as interest (2 equal partners will each have 50% interest in the partnership).

Liability is a different issue in a general partnership. Interest in the company is not relevant to liability for business activity (generally). If a GP is sued, both (or all of the) partners are being sued in a manner that is referred to as "equally and severally liable". What this means in layman's terms is that each of the partners is responsible for paying any settlement or verdict in its entirety. This means until the debt is paid, all partners still owe the debt, even if one partner personally paid 90% and had nothing to do with why they were sued, he is still just as responsible for the last 10% as the other partners.