How to Choose a Legal Structure for Your Business

Setting the right foundation for your business is essential to its future strength and expansion potential. A vital part of this process is choosing the right legal structure. Your decision here can affect taxation, liability, compliance, and operational control, among other aspects. Therefore, it’s worth taking the time to make positive choices early.

Consulting with an experienced business formation attorney is advisable, as they’ll guide you through the process. Still, it’s worth getting to know more about the structures. We’ve put together this guide, applicable to business formation throughout the globe, so you can proceed in an informed way.

What Is a Legal Business Structure?

A legal business structure refers to how a business is organized. Different structures provide differing models for defining ownership, responsibilities, and legislative obligations, among other elements. As a result, there’s greater clarity both internally and externally on various factors. There’s a clear hierarchy for day-to-day decision-making, alongside transparency on who is liable for legal or compliance issues. Profit distribution is also outlined, as are the specific taxation requirements. Even how a business can raise capital is dictated by the business structure a company adopts.

Key Factors to Consider When Choosing a Company Legal Structure

As with any business decision, it’s important to bear various factors in mind when choosing which structure is right for your company.

• Liability: Your potential exposure to liability is an important consideration. Some — such as limited liability companies (LLCs) — shield owners from being personally liable for the business’ debts and lawsuits.
• Taxation: The type you choose will affect taxation. For instance, profits made as a sole proprietor are usually handled through the owner’s individual tax return. Some corporations can avoid double taxation on profits, and gain access to a wide range of deductions.
• Administration: Another consideration is how complex it is to maintain the administration of your structure type. Aside from having more extensive initial paperwork, LLCs also tend to have licensing obligations and must adhere to regulatory compliance.
• Investment: Certain legal structures make it easier to raise capital from investors. For instance, corporations can issue shares and equity, alongside offering investors liability protections.
• Control: The degree of personal control you have over your company will be affected by its structure. Sole proprietorships give owners full decision-making control. LLCs and corporations divide control across boards and other hierarchies.
• Growth: If you have ambitions to expand, particularly into foreign markets and jurisdictions, your choice will affect your flexibility. Your tax obligations and compliance requirements with local laws and regulations can vary based on your choice.

Overview of Common Legal Structures

Sole Proprietorship

A sole proprietorship is owned and operated by a single individual. The simplest form of structure, it gives you full control over business decisions. This simplicity makes it popular among freelancers, independent contractors, and small business owners. From a tax perspective, you’ll report profits and losses via your personal return, though the deductions you can make depend on your jurisdiction. The biggest risk of sole proprietorship is you bear full personal liability for any debts or legal issues.

Partnership

A partnership involves two or more individuals, with the setup being relatively simple, involving a formal partnership agreement in which the terms of ownership. These terms will usually include everything from outlining the roles of the owners to conflict resolution processes. 

In this model, everything is shared between the individual partners — not just profits, but also liabilities and responsibilities. The extent of sharing will depend on the type of partnership. In a general partnership, everything is divided equally. In limited partnerships, some partners — known as limited partners — will take limited responsibility for liabilities, alongside limited control.

Limited Liability Company (LLC)

An LLC combines many of the features of partnerships and corporations. The owners — known as members — have limited liability when it comes to the company’s debts and lawsuits. As a result, your personal assets are protected. There’s also a significant level of flexibility in management and taxation. Members can be taxed as corporations, partnerships, or individuals. Members can also decide to run the company themselves or appoint management. This greater flexibility and accessibility help make LLCs popular across the globe for small to medium-sized businesses with ambitions to grow.

Corporation (C Corp)

A corporation (C Corp) is a legal entity entirely separate from its owners. As a result, shareholders have limited liability protection, shielding them from the company’s debts and legislative issues. From a tax perspective, the company is subject to corporate taxation, meaning that the profits the company makes are usually taxed before being passed onto shareholders. The challenge here is that shareholders may face double taxation. This is important when deciding between LLC vs corporation. 

At the same time, C corps can issue stock, which can attract investors, giving greater potential for expansion. It’s worth bearing in mind, though, that C corps are heavily regulated and must adhere to strict compliance and governance procedures.

S Corporation (U.S. Specific)

Registering as an S corporation is only possible in the U.S. This is a limited liability company that is taxed more like a partnership. This is popular among U.S.-based businesses looking to adopt pass-through taxation — meaning that profits are only reported on owners’ individual tax returns, avoiding the double taxation issues of C-corps. At the same time, S-corps are limited to 100 shareholders, limiting investment potential.

Nonprofit Corporation

Nonprofits are businesses that are specifically structured to serve charitable, educational, and similar purposes. While these companies are not restricted from generating profits, all earnings must be reinvested into the core mission of the business and cannot be distributed among owners. Unlike the other forms, nonprofit corporations may be exempt from paying sales tax, income tax, and property tax as long as they adhere to specific regulations.  

International Considerations

The business landscape today makes international formation across different jurisdictions more accessible. However, it’s vital to understand that the laws governing company registration and structure vary depending on where in the globe you operate. It’s essential to collaborate with legal and financial consultants who have significant experience assisting cross-border businesses. Ascot’s network of experts provides companies with truly global coverage so you can gain insights and guidance no matter where in the world you are.

Changing a Legal Business Structure

While picking the right company type the first time is ideal, there are occasions it may be necessary to change.Your sole proprietorship might be growing to the extent that a partner is necessary. Perhaps your LLC requires the greater investment potential a corporation allows for. 

Restructuring can be quite a lengthy and involved process. You’ll need to collaborate with experienced attorneys to identify the relevant regulations related to your intended change, including the tax implications of the structure. In some instances, you’ll need approval from other stakeholders. From here, you’ll make plans to adjust the leadership hierarchy and other elements of your business, alongside updating the enterprise’s documentation.

Comparing Structures: Summary Table

We’ve created a summary of key characteristics for each business type, to help your decision-making.

Structure	Liability Level	Tax Reporting	Formation Complexity	Investment Suitability
Sole Proprietor	Unlimited	Personal	Low	Minimal
Partnership	Shared	Personal	Moderate	Moderate – mostly from private investors and other partnerships
LLC	Limited	Flexible	Moderate	High – from individuals, angel investors, other LLCs, and corporations
C Corporation	Limited	Corporate	High	Very High – diverse investor and shareholder opportunities
S Corporation	Limited	Pass-through	High	Moderate – restricted number of shareholders
Nonprofit corporation	Limited	Usually exempt	High	Usually mission-driven

Legal and Financial Guidance

It is vital to consult experienced law and tax professionals before making your final decision. They’ll assess your needs and guide you through the administrative processes. Across the globe, some typical registration steps include registering your company name, gathering documents such as articles of incorporation, and obtaining regionally relevant permissions. Even after formation, you’ll need to plan your ongoing compliance framework, so you can stay on top of any necessary filings, taxes, and licenses.

FAQs

How do I know which legal structure is right for my business?

The right type depends on various factors, from the number of owners to the level of liability protection you want. It’s vital to carefully evaluate your unique set of needs before making decisions.

Can I change my business structure later?

You can change your business type, but the process can be complex. Restructuring may involve legal filings, regulatory approvals, and potential tax consequences.

Is an LLC or Corporation better for international operations?

Both offer liability protection no matter where in the world you operate. However, which is better can depend on the jurisdiction you’re targeting and the tax treaties present.

Does my legal structure affect how I pay taxes?

Yes, because the structure you choose for your company impacts how profits are taxed. Some are taxed at the business level while others you’ll only report on your personal return.

Is there a universal best structure?

No, there isn’t a single superior type. The appropriate choice depends on your company’s goals, its location, size, and legal environment, among other factors.

References

Internal Revenue Service. (2025, February 14). Limited liability company (LLC). Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

Chizoba, M. (2024, August 30). Do Nonprofit Organizations Pay Taxes? Investopedia. https://www.investopedia.com/ask/answers/08/nonprofit-tax.asp
Internal Revenue Service. (2025, February 18). S Corporations. Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations