Choose a legal structure: sole proprietor, partnership or limited company

Choosing a legal structure for your business settles three things you notice every day: who is liable if things go wrong, how profit is taxed and how much admin and cost come with it. Most founders start as a sole proprietor or, with a partner, in a partnership. A limited company usually comes into view later, when profit grows or the risks increase. That is a sensible starting point, not a law of nature.

The names differ by country; the principles hardly do. India's Startup India portal, for example, names taxation, owner liability, compliance, funding and exit as the factors that decide the choice. The same factors apply in Toronto, Lyon or Brisbane.

Three questions that decide your legal structure

• How big is your risk? If a mistake in your work can cause serious damage, or you sign a lease, take on staff or buy stock on credit, limited liability weighs more heavily.
• How much profit do you expect? With modest profit, personal income tax usually works out fine. With high profit, a company and its corporate tax rate become more interesting.
• How much admin and cost can you carry? A company means formation costs, annual accounts, public filings and often a more expensive accountant.

A fourth question comes on top if you do not start alone: will partners or investors join? Investors buy shares, so they almost always want a company. With partners, put the agreements in writing whatever the structure; starting with a co-founder covers what to agree.

The main types of business structure

Sole proprietorship or sole trader

You and the business are one person in law. Starting is simple and cheap; in the US you are a sole proprietor automatically if you do business without registering another structure, according to the SBA. The price is unlimited liability: GOV.UK puts it plainly that a sole trader is personally responsible for all the debts of the business. France is an exception: an entrepreneur individuel has business and personal assets separated automatically since 15 May 2022 (source: service-public.fr, March 2026). Profit is taxed as your personal income.

General partnership

Two or more owners run the business together, and each is personally liable for all its debts, including those a partner incurred. In the Netherlands, creditors can claim the partners' private assets; in Canada, partners are individually and collectively responsible. A written agreement is often not compulsory, but always wise.

Limited partnership and limited liability partnership

In a limited partnership, at least one general partner carries unlimited liability, while limited partners risk only what they put in, as with the German KG or an Australian limited partnership. A limited liability partnership (LLP) goes further: in the US it gives limited liability to every owner. The rules for both differ per country.

Limited company, LLC or corporation

The company is a legal entity separate from you. On GOV.UK's description, owners are responsible for its debts only up to the value of their investment. In the US the equivalents are the LLC, which protects owners in most cases, and the corporation. A corporation pays income tax on its profit, and you pay tax again on salary or dividends; an LLC's profit can pass through to your personal income without corporate tax, according to the SBA. Capital rules vary widely: a Dutch BV needs €0.01 (source: business.gov.nl, October 2026), a German GmbH €25,000 (source: German Federal Ministry for Economic Affairs and Energy, October 2026).

Other structures

A cooperative is owned by and run for the people who use its services, such as farmers who sell together, and members usually vote equally. Foundations and other non-profits suit a social purpose, not a business whose profit you want to take out. In Australia, a trust is one of the standard structures on the government portal; it needs specialist advice.

Business structures compared in eight countries

Checked on official government portals in October 2026. Rules, fees and capital requirements change, so confirm them on your country's portal before you decide.

When is a limited company worth considering?

The tax comparison is usually the turning point. Where a company pays corporate tax on its profit, you pay personal tax again on what you take out. In the UK, for example, corporation tax is 19% on profits of £50,000 or less and 25% above £250,000, with marginal relief in between (source: GOV.UK, October 2026). In the US, S corps pass profits and some losses straight through to the owners' personal income. Whether a company saves money therefore depends on your profit and your country's rates, and the saving has to beat the extra cost.

Fictitious Firmfocus example. The tax saving is an assumed amount to show the trade-off; your accountant calculates the real figure for your country. The logic works in any currency.

Tax is not the only reason. A company also becomes interesting when you want to keep profit in the business to invest, when you face liability risks you cannot insure, or when investors want shares. That is why many founders start as a sole proprietor and move the business into a company later. Have a tax adviser guide that move, because the way you transfer the business can decide whether you pay tax on its value straight away. How the tax side works for each structure is in tax and bookkeeping.

Small start or larger start

Check your country before you decide

• Official portal: read your government's business portal, not a seller of company formations.
• Capital and notary: check whether a minimum capital, a notarial deed or a registered agent is required.
• Tax comparison: ask an accountant to compare your after-tax income per structure at your expected profit.
• Director duties: find out what duties and personal liabilities come with running a company in your country.
• Registration: note which body registers your structure; see register your business.

Pitfalls when choosing a legal structure

• Choosing on tax alone: a small tax gain can disappear in accountancy fees and admin time.
• Trusting the company to shield you from everything: personal guarantees and director duties can still reach your private assets.
• A partnership on a handshake: without a written agreement, an exit or dispute is settled by default rules that may not suit you.
• Copying a structure from another country: a US LLC, a UK Ltd and a German GmbH differ in tax, capital and formalities.

This is step three of start in eight steps. Every other topic for founders is in Start a business.