Starting a business can be both professionally and personally rewarding, but one of the first decisions you’ll have to make is choosing the right business structure. Whether you’re thinking about running things on your own, teaming up with a partner, or forming a company with more structure, it’s worth understanding how each type works.
At Remitly, we understand that building a life in a new country comes with many decisions, and starting a business can be one of the most exciting. In this article, we’ll break down the differences between sole proprietorships, LLCs, and partnerships so you can choose which business structure is the best fit for you.
Comparing LLC vs. Sole Proprietorship vs. Partnerships
Every business entity in the US needs a legal structure. While there are several options, most new entrepreneurs choose between a sole proprietorship, LLC, or partnership.
Overview of business structures
A sole proprietorship is the simplest way to start a business. There’s no legal separation between you and your business, which means you’re personally responsible for any debts or liabilities. You can operate under your own name or a business name. This structure is common for freelancers, consultants, and solo service providers.
An LLC, or limited liability company, offers more protection. It creates a legal separation between your personal finances and your business. That means your personal assets—like your home or savings—are generally protected if you encounter legal or financial trouble. LLCs are also more flexible and involve less paperwork than corporations, making them a popular choice for small business owners.
A partnership is when two or more people go into business together. You share the responsibilities, the decisions, and the profits. Partnerships can be simple or more structured, depending on how you set them up, and they’re often a good fit for co-founders or family-run businesses.
Why choosing the right business structure matters
The way you set up your business affects how you operate day-to-day. It plays a role in how much risk you take on, how your taxes work, and how decisions get made.
For example, an LLC helps protect your personal savings or home if the business runs into problems. However, a sole proprietorship doesn’t offer that protection. When it comes to taxes, some structures let you report business income on your personal tax return, while others may be taxed separately.
Key questions to ask yourself before choosing
- Personal liability: Do you want to protect your personal assets from business debts or legal claims?
- Growth plans: Will you want to bring in investors or shareholders later on?
- Tax preferences: Would a simple tax setup work best, or do you need flexibility as you grow?
- Management style: Would you rather have full control or share responsibilities with others?
Sole proprietorship
If you’re starting a small business on your own, there’s a good chance you’re already a sole proprietor even if you haven’t filed any paperwork. It’s the most common way to run a business in the US, especially when you’re just getting started.
Definition and characteristics
A sole proprietorship means you and your business entity are legally the same. That might sound a little strange, but it simply means there’s no legal separation between your personal finances and your business ones.
This structure is appealing to many first-time entrepreneurs because it’s easy to set up. It’s especially useful for people offering low-risk services or running small operations on a budget. But it’s important to understand that you’re personally responsible for everything the business does.
Pros and cons of sole proprietorship
Pros:
- Simple setup – No need for formal registration in most cases
- Low startup costs – Minimal fees or paperwork
- Full control – You make all business decisions yourself
- Easy taxes – Business income is reported on your personal tax return
Cons:
- Unlimited personal liability – You’re responsible for any business debts or legal issues
- Harder to get funding – Lenders and investors often prefer LLCs or corporations
- Higher self-employment taxes – You’ll owe both the employer and employee portions of Social Security and Medicare
- Less credibility – Some clients may view sole proprietorships as less professional
Tax implications and personal liability
As a sole proprietor, you’ll report all your business income and expenses using Schedule C on your personal tax return (Form 1040). You’ll also pay self-employment taxes, which cover Social Security and Medicare contributions.
The most important thing to bear in mind is that there’s no legal separation between you and your business. If someone sues your business or you can’t pay off a debt, your home, car, or savings could be at risk. That’s why some business owners start as sole proprietors and later switch to an LLC once their business grows or involves more financial risk.
Limited liability company (LLC)
If you want more protection while keeping your business setup manageable, an LLC might be the right fit. It’s a popular choice for small business owners who want to grow with confidence.
Definition and characteristics
An LLC is a business structure that separates your personal and business finances. That means if the business has debts or gets sued, your home and savings are usually safe. You can run an LLC alone (called a single-member LLC) or with others (a multi-member LLC).
To get started, you usually need to:
- File Articles of Organization with your state
- Pay a state filing fee
- Choose a registered agent
- Create an Operating Agreement (recommended, but not required)
LLCs are also flexible in how they’re managed. You can manage the business yourself or appoint someone else to do it (member-managed vs. manager-managed structures).
Advantages of an LLC
Main benefits of an LLC include:
- Limited liability protection – Your personal assets are typically safe from business lawsuits or debts
- Flexible tax options – LLCs can choose how they want to be taxed
- Credibility – An LLC may look more professional to banks, clients, and partners
- Less formal than corporations – Fewer reporting requirements and simpler operations
Tax-wise, the IRS treats a single-member LLC like a sole proprietorship by default, and a multi-member LLC like a partnership. However, you can elect to have your LLC taxed as an S corporation or C corporation if that suits your situation better.
Disadvantages and legal protections
Forming and maintaining an LLC does require more work than a sole proprietorship. For example:
- State rules vary – Some require an annual report or franchise tax
- Startup and maintenance costs – Fees can vary depending on your state
- Ongoing compliance – You may need to file separate tax forms or keep specific records
Also, limited liability isn’t unlimited. If you mix personal and business finances, commit fraud, or don’t follow proper business procedures, a court might decide that you’re personally liable—this is called “piercing the corporate veil.”
Some professionals like doctors, lawyers, and accountants may not be allowed to form standard LLCs. It’s a good idea to read up on any special rules about forming an LLC to double-check what applies to you.
Partnerships
Partnerships are a common way for two or more people to go into business together, especially when each person brings unique skills, resources, or expertise to the table.
Types of partnerships: general and limited
A partnership means that two or more people (or companies) agree to share the profits, responsibilities, and decisions in running a business. There are different types to be aware of:
- General partnership: All partners actively manage the business and share personal responsibility for its debts and legal obligations.
- Limited partnership: Includes at least one general partner who runs the business and assumes full liability, and one or more limited partners who contribute capital but don’t participate in day-to-day operations. Limited partners’ liability is usually limited to their investment.
Pros and cons of forming a partnership
Advantages of partnerships:
- Shared responsibility – You’re not doing everything on your own
- Complementary skills – Each partner can focus on what they do best
- Easier to start – Fewer formalities than corporations or LLCs
- Pass-through taxation – Profits are reported on each partner’s personal tax return
Challenges to consider:
- Shared liability -In a general partnership, you’re personally liable for the business and for actions your partner takes
- Potential for conflict – Disagreements about business decisions can strain relationships
- Complexity as you grow – Bringing on new partners means updating your agreement and possibly your business registration
LLP vs. general partnership
A Limited Liability Partnership (LLP) is another option, used most often by licensed professionals like doctors, accountants, or lawyers who work in a shared practice. If something goes wrong, each partner is usually only responsible for their own actions and not for the mistakes of others.
LLPs are not available in every state and may be restricted to certain professions. If you’re considering this route, check your state laws or speak with a legal advisor to see if it’s a fit for your business.
Taxation and liability comparisons
Understanding how taxes and liability work for each business structure can help you make smarter decisions and avoid surprises down the road.
LLC vs. sole proprietorship
If you’re a sole proprietor, you’ll report all your business income and expenses on your personal tax return, typically using Schedule C.
A single-member LLC works in a similar way. You still report income on your personal taxes unless you choose a different status. Some business owners elect to be taxed as an S corporation to possibly lower their self-employment tax bill.
Multi-member LLCs are treated more like partnerships, with each member reporting their share of income. But LLCs can also choose to be taxed as a C or S corporation, depending on what makes the most sense financially.
Partnership vs. LLC
Both LLCs and partnerships use pass-through taxation. That means each partner or member reports their portion of the business’s profit on their personal tax return.
The biggest difference comes down to liability:
- In a general partnership, each partner is personally responsible for the business’s debts and legal obligations, including those caused by other partners.
- In an LLC, your personal assets are typically protected, as long as you keep business and personal finances separate and comply with your state’s regulations.
Which business structure pays less tax?
Taxes can feel confusing, but the good news is that most small businesses don’t pay taxes twice. Sole proprietorships and partnerships both pass income through to your personal tax return, so you’re taxed just once at your individual rate.
Many small LLCs do the same but may have the option to file as an S corporation to reduce self-employment taxes, depending on how much they earn.
A C corporation is different because it pays taxes as a company, and then the owners pay again on any dividends they receive. That’s called double taxation, and it’s usually not ideal for small or new businesses unless you’re planning to raise significant investment. The best tax setup for your business depends on your income, growth plans, and how much time and paperwork you’re ready to take on.
Choosing the best structure for your business
Whether you’re running things solo or teaming up with a partner, it’s worth taking a little time to think about what setup works for your goals.
Factors to consider
Think about how much personal protection you want. If keeping your home, savings, and other assets safe is a priority, an LLC could give you that peace of mind. On the other hand, if you’re just testing an idea with low risk, a sole proprietorship might be a simple and cost-effective way to start.
Next, consider your tax situation. Do you want something simple, or are you open to more formal structures that might offer long-term savings? Finally, are you running the business on your own, or are you building it with someone else? These questions can help guide you toward the right option.
Consulting with legal and financial professionals
If you’re unsure which option is right for you, talking to a professional can really help. A lawyer can explain how to protect your personal assets and help you with any necessary paperwork. An accountant can walk you through your tax responsibilities and make sure you understand what to expect. You don’t need to figure everything out on your own, there are professionals who can help you set up your business the right way.
Making an informed decision for your small business
The best structure for your small business depends on where you are now and where you hope to go. A sole proprietorship can be a good starting point if you’re keeping things small, but if you’re thinking long-term or planning to grow, forming an LLC or partnership might give you more flexibility and protection.
FAQs
What’s the difference between an LLC, sole proprietorship, and partnership?
A sole proprietorship is the simplest structure. You’re the only owner, and there’s no legal separation between you and your business. A partnership involves two or more people sharing profits, responsibilities, and risks. An LLC gives you more protection by keeping your personal assets separate from your business, while still offering flexible tax options.
Which structure is easiest for immigrants to start with?
Many immigrants start as sole proprietors because it’s quick and low-cost, often requiring little more than a business license. But if you want personal liability protection, forming an LLC is a great next step. A partnership works well if you’re building a business with someone you trust and can clearly define roles and responsibilities.
Do I need to register my business to be a sole proprietor?
In most cases, no formal registration is needed to be a sole proprietor, unless your local area requires a business license or permit. Once you start earning money from your work or services, you’re automatically considered a sole proprietor. Just make sure to check your local city or state rules.
Can I change my business structure later?
Yes. You can start out as a sole proprietor and switch to an LLC or partnership later if your business grows or your needs change. Many entrepreneurs start simple and adjust as they go.