Should I form an LLC, a corporation, or a sole proprietorship?
A sole proprietorship is best suited to small businesses that are owned and run by one person with low risk and low profits. Generally, these businesses don’t have a wide range of customers but rather a small, dedicated group. Sole proprietorships often start as hobbies that grow into a business. Because there is no separation between the owner and the business, the owner is entitled to all of the profits. However, the owner is also entitled to all of the debts and obligations and can even be held responsible for liabilities caused by employees.
LLCs are perfect for most small businesses due to their simplicity, affordability, flexible taxation structure, management flexibility, and minimal recordkeeping and reporting requirements. Note that not every business can operate as an LLC, so check your state statute. For instance, the banking and insurance industries are typically prohibited from forming an LLC, while some states like California and Nevada prohibit licensed professionals like accountants, attorneys, architects, physicians, from forming an LLC.
Corporations are best suited for businesses that want to raise funding from venture capitalists and other investors. Corporations can become publicly traded companies, whereas LLCs and sole proprietorships cannot. With that said, corporations have to meet certain requirements that may not be well suited to a small, informally run business. For instance, corporations must hold annual shareholders meetings, file annual reports, and pay annual fees to the state and have onerous recordkeeping requirements.