When starting or registering a business, one of the most critical decisions is choosing the right business structure. The business structure describes the entire business entity, including the governance model, and the tax responsibilities and requirements dictated by the IRS.

Below is a brief description of four common business structures.

Sole proprietorship

A sole proprietor is an individual who runs and operates the entire enterprise. In a sole proprietorship, your personal tax return Form 1040 must include all your business expenses and revenue, filed along with a losses and profit record called Schedule C. You can brand the business, though you may not sell stocks unless you choose to change the structure.

Partnership

A partnership involves two or more people who own or run a business together. You can have a general partner who assumes responsibility for certain liabilities and obligations, or a limited partner who only serves as an investor and has no control over the company and is not subject to liabilities. The partnership agreement describes the roles and obligations of each partner. The business must file the tax return Form 1065, reporting income and loss to the IRS. Each partner must also indicate his/her share of the profits and losses on Schedule K-1.

Corporation

A corporation is a legal business entity separate from its owners. As an independent entity, the corporation can make profits and losses and assume tax responsibilities and other liabilities. Incorporating protects you from personal liabilities involving the business. However, corporations are expensive to establish and required to comply with stringent state laws and tax requirements. The IRS taxes both corporate profits and dividends distributed to shareholders.

Limited liability company

An LLC provides the owners with the liability protection of a corporation but without the double taxation drawback. Profits and losses pass through the owners’ personal income, and they pay taxes through personal tax returns. However, owners have to pay self-employment contributions. State laws govern and set the particular regulations and requirements for LLCs.

You can reorganize your business from one structure to another, but you must notify your state tax agency and the IRS of such changes. Choose a structure that best suits your business model and needs.