How to Choose a Business Structure

Small Business

Choosing the right business structure is one of the most important decisions you’ll have to make when starting your business. Your business structure directly affects the protection of your personal assets, how you fund your business, and more.

If you’re not sure which structure is right for you, we’re here to help. In this How to Choose a Business Structure guide, we’ll break down the most common business structures including pros and cons to help you make an informed decision that’s right for your new business.

Our Recommendation

For most small businesses, forming a Limited Liability Company (LLC) is often the best way to go as it’s relatively easy to set up, offers legal protection for your personal assets, and avoids the double taxation faced by traditional corporations.

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We recommend using a service like Northwest Registered Agent to form your LLC. For just $29 plus state filing fees, Northwest will form your LLC and provide a year of free registered agent services.

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Choosing the Right Business Structure

Ready to form your new business? The first step is to determine the right structure for your business. We’ve outlined the top business structures in Michigan below to help you determine the best fit for your business.

Sole Proprietorship: The Simplest Way to Start a Business

What It Is: A business owned and operated by a single individual with no formal entity, meaning the owner and the business are legally the same.
Advantages:
- It’s easy to set up; you can simply start doing business under your own name. If you want a business name or brand, you will need to file a “Doing Business As” (DBA) name.
- Useful for testing a low-risk business idea (like starting a blog or offering consulting services) before you commit to a formal structure.
Drawbacks: Offers no protection for personal assets. If the business faces a lawsuit or debt, your personal possessions can be at risk. Also looks less legitimate unless you have a DBA, but if you’re going down that road you might as well go with an LLC.

General Partnership: Should Be Avoided

What It Is: When two or more people start a business without forming a legal entity; similar to a sole proprietorship but with more than one person.
Advantages: Simplicity — you can agree to just do business together without having to register a business.
Drawbacks: Each partner can be held responsible for the actions of any other partner. All partners can be sued for the full amount of any liabilities, regardless of how much or how little they own in the business.

Because of these risks, most advisors recommend forming a formal structure — like an LLC or corporation — when partnering with others.

Limited Liability Company (LLC): The Recommended Option

What It Is: A popular, flexible business structure that separates personal and business assets, offering “limited liability” protection.
Advantages:
- Liability Protection: Your personal assets are generally shielded from business-related debts and lawsuits.
- Tax Flexibility: In a default LLC, profits “pass through” to the owner(s)’ personal tax returns, helping you avoid double taxation.
- Ease of Maintenance: Less strict record-keeping and reporting requirements compared to corporations.
- Simplicity in Setup: Forming an LLC is typically quick and straightforward.
Suitability: Ideal for most small businesses, whether there is one owner (single-member) or multiple owners (multi-member).

For more information, have a look at our How to Start a Michigan LLC article.

C Corporation: Best for Raising Capital

What It Is: A more formal structure where the business is a separate legal entity with shareholders and a board of directors.
Advantages: Credibility with investors, unlimited growth potential (easy to sell shares or bring in new investors).
Drawbacks: Often subject to “double taxation,” where profits are taxed at the corporate level and then taxed again when distributed to shareholders as dividends. Corporations also have stricter governance and reporting requirements and therefore higher maintenance costs.

S-Corporation (Tax Election Status)

What It Is: Not a separate legal structure but a special tax classification an LLC or corporation can choose to elect with the IRS.
How It Works:
- Income is split into a reasonable salary (which is subject to employment taxes) and dividends (which typically aren’t subject to self-employment taxes).
- The reasonable salary must be equal to a fair market rate.
- Still maintains pass-through taxation, so the business itself usually isn’t taxed at the corporate level.
Who Benefits: For businesses that are generating enough profit so that the tax savings outweigh the additional costs of S-Corp compliance, choosing this route can be advantageous.

If you’re unsure whether an S-Corp election makes financial sense for your business, use our S-Corp vs. LLC Calculator for a quick estimate.

Having said that, you should note that S Corp status comes with additional paperwork and strict rules on ownership and stock classes, as well as a mandatory “reasonable salary” that must be taxed, so it’s often not suitable for new businesses.

How to Choose the Right Business Structure

For most small businesses just starting out, an LLC provides a practical balance of liability protection, tax efficiency, and ease of management. Plus, it is much easier to form than other business structures.

If you plan on attracting significant outside investment or going public, a corporation might be worth considering, and if your revenue is large enough, you’ll likely want to explore electing S-Corporation status in order to potentially lower your tax obligations.