A business organization determines who is liable for a business and how the business pays its taxes. The most common forms of business organization are sole proprietorships, partnerships, limited liability companies and corporations. When one or more people conduct business, the state and the IRS consider the business a sole proprietorship or partnership by default, while other forms of organization require significant paperwork and legal proceedings.
Many small businesses, including independent contractors or consultants, are sole proprietorships and partnerships. In this form of business organization the owner or owners of the business are liable for the business, which means that owners are personally responsible for any debts or obligations incurred by the business. Sole proprietors and partners file a regular tax return with an additional form to report their business income, profits and losses.
Sole proprietors and partnerships often choose to incorporate or become a limited liability company to protect their personal assets and avoid liability in most circumstances. The limited liability company is the simplest limited liability option to establish and run, though the exact process is different in each state. The IRS treats limited liability companies exactly like sole proprietorships and partnerships. Corporations are subject to strict financial and documentation requirements, making them an unattractive option unless incorporation is essential to a company's business goals.