Determining how to structure a new business can feel like one of the most daunting and mundane tasks in creating a startup company, but it can also be one of the most crucial decisions. It determines who will be liable if the company goes into debt or bankruptcy, it can negatively affect the personal income taxes of owners, and the wrong decision may even limit the company’s decisions and possibilities. For these reasons, startup companies should investigate the pros and cons of each business structure and carefully weigh them against the company’s current and projected needs.

Sole Proprietorships

As one of the simplest business structures to set up, sole proprietorships are popular choices for solo businesses with few or no employees. Expenses and income are all included on the owner’s personal income tax return, which can offset income from other sources if the company experiences a loss. There are, however, some drawbacks to this business structure, namely the fact that the owner is responsible for all liabilities. They are highly susceptible to having their personal assets seized if their company goes under and decides to file bankruptcy. However, if there is adequate insurance or few assets to protect, it can prove to be an easy, low-cost solution to starting up a new business.