Choosing a small business structure is a significant milestone for any entrepreneur, but it’s crucial to set up correctly to avoid complications and unexpected liability down the road.
In our webinar, Structuring Your Entity: Best Practices in Small Business Formation, Anthony Gibbs of CSC and Chris Van Leeuwen of Insurance Canopy offer expert insights on what to consider when forming and protecting your small business. Watch the webinar ↓
Small Business Structure Basics in 60 Seconds
- Form your entity immediately — don’t wait until revenue starts to roll in
- Small business owners commonly incorporate their businesses as LLCs (limited liability companies) or corporations
- Choose your business formation based on factors such as your long-term goals, autonomy preferences, and tax-filing considerations
- Get small business insurance as soon as you form your entity
This blog is for informational purposes only and does not constitute legal or insurance advice. Speak with a formation service professional or a licensed insurance agent for guidance on your specific business situation.
What Is Business Structure and Why Does It Matter?
A business structure is the formal legal classification of a company. It matters because it determines how your business is owned, taxed, and managed, as well as where liability lands in the event of a lawsuit.
If you’re starting a small business, it’s crucial to choose the appropriate small business formation now to avoid ownership or tax complications later. Having the right structure in place can also affect whether your personal assets are drawn if your business ever gets sued.
Expert Insight
“When you take the step of incorporation — turning your business into an LLC or a corporation (the two most common entity types) — that creates what’s called a corporate veil, and it makes your business its own separate entity with its own EIN (Employer Identification Number), which is like a social security number for a company.”
The corporate veil is what separates your business from you, the business owner, including your home, savings, and other personal assets.
The Most Common Small Business Structures
Common small business structures include sole proprietorships, LLCs, corporations, and partnerships. Here are the ownership, liability, and tax basics of each.
Swipe →
| Sole Proprietorship | LLC | Corporation (S-Corp/C-Corp) | Partnership | |
|---|---|---|---|---|
|
Ownership |
One person |
One or more members |
Shareholders |
Two or more partners |
|
Liability Protection |
None, your personal assets are at risk |
Yes, your personal assets are generally protected |
Yes, your personal assets are generally protected |
Limited: General partners have personal liability |
|
How It’s Taxed |
Pass-through to personal taxes |
Pass-through to personal taxes (default) |
C-Corp: Taxed at the business level and again as personal income; S-Corp: Pass-through |
Pass-through to each partner’s personal taxes |
|
Complexity |
Very low: No formal registration required |
Low to moderate: State filing required |
High: Ongoing compliance, recordkeeping, and reporting |
Moderate: Still requires a clear partnership contract |
|
Best For |
Freelancers or side businesses testing the waters |
Most small and solo service-based businesses |
Businesses planning to raise investment or scale significantly |
Co-owned businesses with two or more active partners |
When you start a business without incorporating, you’re operating as a sole proprietor by default. Forming your business into an LLC, corporation, or partnership provides an additional layer of protection and creates a more defined structure for how you file taxes and make decisions.
When Should I Form an Entity?
“Right away. No one is going to wait to sue you. If you start your business without having an incorporation or certain insurances in place, you may open yourself up to having all your personal assets and everything you’ve worked for under fire.”
How to Choose the Right Structure for Your Small Business
Consider these factors as you explore how to choose a business structure.
Start with your long-term vision:
- Do you plan to stay solo, or bring on partners or investors later on?
- Are you building a business to sell, or one to run for years?
- Do you want safeguards in place for how business decisions are made?
Anticipate how many owners will be involved:
- You’re a solo owner with no plans to add others → LLC is usually the right starting point
- Your business has two or more owners → A partnership or multi-member LLC may be a good fit
- You plan to bring on investors, or issue shares → A corporation may be worth exploring
Think about how you want to be taxed:
- If you prefer simplicity → LLCs and sole proprietorships use pass-through taxation (you file for your business on your personal tax return)
- If you expect significant profits or outside investments → An S-Corp or C-Corp structure may offer tax advantages worth talking through with an accountant
LLCs are a popular option for small business owners because they offer the simplicity of pass-through taxation. This reduces the complexity of filing separate business taxes while protecting the owner from personal liability.
Corporations have a more complex structure, but offer the benefit of raising capital through shares. This makes them a better fit for businesses that expect to bring on investors or go public. However, corporations face double taxation, which can be tough for solo-owned businesses at the startup stage.
Key Takeaways
- For most small businesses, LLCs offer the right balance between liability protection and simplicity
- Corporations are ideal for businesses seeking outside investors or planning to grow significantly
- Choosing your business structure when you first start your business is key to protecting it down the road; take care of this step now as you create your small business plan
LLC vs Corporation: What’s Right for My Business?
“For example, if you have a plumbing company, and you’re running it alone — you might have your son or daughter help out — it might make sense to just do an LLC and keep that simple structure. If you’re going to have a boardroom, a conglomerate, or plan to acquire different companies, then a corporation is probably going to make more sense for you.”
Common Business Structure Mistakes to Avoid
Set your business up for success by avoiding these common pitfalls:
- Don’t form your business entity in another state to avoid paying state income taxes; the state you actually do business in will eventually require you to register there, too
- Don’t choose your business structure based solely on your current situation; consider your long-term growth goals so your entity can keep up with investments, transfer, or expansion
- Don’t accidentally form your business in two states; this will create two separate entities, which can cause administrative complications later
- Don’t wait too long to incorporate your business, as this leaves you exposed to personal liability
- Don’t assume that forming an LLC or corporation provides full protection from all business risks — you still need business insurance for financial support in case of liability claims
- Always maintain a separate business bank account; don’t “pierce” the corporate veil by mixing business and personal funds
- Ensure your business entity’s name matches your insurance policy, as this determines who is covered by the policy
How Business Structure Affects Business Insurance
Business entities have their limitations, which is where business insurance comes in. Small business insurance is intended to fill the gap that your entity structure leaves open by providing financial coverage for liability claims and lawsuits.
Separating your business from yourself = Protection for your personal assets
Protecting your business with insurance = Safeguards your business assets in case of a claim
Expert Insight
“People ask me all the time, ‘Can I get sued?’ Yes, any small business can get sued, and that means you’ll start accumulating legal defense costs and other things that can be an exposure to your business. So, as soon as you get that business entity started, that’s when I’d start looking at insurance. You want to make sure you’re covered.”
If your business accidentally harms a third party, such as a customer or client, and faces a liability claim, your insurance policy can help cover the costs of legal defense, settlement fees, or damages awarded. With insurance, one small mishap doesn’t have to derail everything you’ve built.
For many small businesses, the essential coverage to start with is general liability insurance, which can cover third-party bodily injury or property damage. From there, build your policy according to your unique risks with additional coverages, such as professional liability or product liability insurance.
Key Insurance Takeaways
- General liability insurance is a must-have for any business because it covers the most common type of third-party bodily injury and property damage claims (and lawsuits)
- Workers compensation insurance is a legal requirement in most states if you hire employees, and in some cases, it can cover you, the business owner, if you’re injured while working
- You can obtain small business insurance coverage regardless of your entity type (sole proprietors included); however, always ensure your policy is under your business entity’s name, with the correct entity type listed
- Your business entity type can affect who is and isn’t automatically listed on your policy; for example, if you have an LLC, your spouse must be listed as a member or employee for them to be covered by the policy
- Regularly review and update your insurance coverage as your business grows or pivots, especially if you start offering services or products that are significantly different from your original business operations
Hear From the Experts: Watch the Full Webinar
Watch the full webinar video to hear from the experts themselves! Anthony Gibbs and Chris Van Leeuwen explain business structure and insurance in depth, including:
- How to form an entity
- The two operating styles of LLCs
- The costs of forming LLCs vs corporations
- Insurance coverages for growing businesses to consider
- The myth that you must be sued for insurance to pay out (the truth: insurance can pay whether or not a lawsuit is filed)
Plus, Chris breaks down a $2 million petting zoo claim involving a pig bite — and how a coverage limit can affect your personal liability! Click below to watch now.
Protect your new business entity from day one! Insurance Canopy offers simple, affordable small business insurance you can buy and manage online, so you can focus on taking your business to the next level.
FAQs About Choosing Small Business Structures
What Is the Best Business Structure for a Small Business?
The best business structure for a small business depends on the business owners’ overall goals (as far as selling, passing the business down, or obtaining investor capital), plus their preferences for tax filing and decision-making processes. That being said, many small businesses commonly opt for either an LLC or a corporation as their incorporated business structure.
LLC vs Corporation for a Small Business: Which Is Better?
For small businesses that don’t have plans to bring on investors or prefer a simpler structure, an LLC might be a good fit. However, if you expect to raise investor capital and need stronger approval systems established, a corporation may be an ideal structure for your small business.
How Does My Business Entity Affect the Insurance I Need?
In general, your business entity doesn’t necessarily affect the type of insurance you need, because your risk exposures remain the same regardless of your legal structure. However, whether you’re an LLC or a corporation affects who is automatically insured, including spouses or partners.
Always speak with a licensed professional for clarification on how your entity affects your coverage.
Do I Need Insurance if I Already Formed an LLC?
Yes, you still need business insurance if you formed an LLC. While an LLC separates your business assets from your personal ones, it doesn’t prevent someone from filing a lawsuit against your business. Insurance is designed to protect your business from paying for claims on its own, so your venture can still thrive if something unexpected happens.
Should My Insurance Policy Be in My Name or My Business’s Name?
If your business is an LLC or corporation, your insurance policy should be under your legal business entity name. If you’re a sole proprietor, your policy will generally be under your personal legal name, with your business name added as a DBA “Doing Business As” name.
Kyle Jude | Program Manager
Kyle Jude is a Program Manager at Insurance Canopy, where he helps design and maintain liability coverage for small business owners. With 10+ years of experience in the insurance industry, he works closely with carriers, underwriters, and compliance teams to ensure coverage remains accurate, responsive, and aligned with real-world risks.
Kyle Jude is a Program Manager at Insurance Canopy, where he helps design and maintain liability coverage for small business owners. With 10+ years of experience in the insurance industry, he works closely with carriers, underwriters, and compliance teams to ensure coverage remains accurate, responsive, and aligned with real-world risks.
