Why Does Choosing the Right Business Structure Matter?

When starting a new business, one of the most important decisions you’ll make is how to structure it. Your choice of entity affects everything, from taxes and liability protection to how management is handled. Choosing wisely at the beginning can save you significant costs, complications, and risk down the road.

An experienced business law attorney can help you weigh your options and align the business structure with your goals. At Cook Tillman Law, we often start by asking: “Why are you launching this business, and what do you want it to accomplish?” From there, we tailor recommendations around both your short-term needs and your long-term vision.

In today’s blog, we’re sharing the basics of business structure and how choosing an entity can shape the future of your business.

The Basics of Business Entities

Most business owners will choose from one of these common structures:

• Sole Proprietorship – Owned by one individual, this is the simplest structure. While it’s easy to start, the owner has unlimited personal liability for debts and obligations.

  
  

• General Partnership – Here, two or more owners share management and liability. The partners pool capital and share profits, but they’re also each personally liable.

  
  

• Limited Partnership – This structure has both general partners, with management control and personal liability, and limited partners, whose liability is limited to their investment.

  
  

• Corporation (C Corp) – This separate legal entity can have potentially unlimited shareholders. It provides liability protection but requires formal governance (via a board of directors, officers, and bylaws).

  
  

• Limited Liability Company (LLC) – These are a flexible hybrid of a corporation and a partnership. Owners (called members) are shielded from personal liability, as with a corporation, but, like in a partnership, are taxed on company income whether or not it is distributed or retained by the company.

  
  

• S Corporation – This is not technically a type of entity, but a tax election for qualifying corporations or LLCs. For corporations, an S-Corp election allows profits and losses to “pass through” to shareholders as in a partnership. For LLCs, the election can reduce employment tax liability.

Four Critical Factors to Consider

When deciding on a business structure, we recommend focusing on four key areas:

1. Number of Owners – A sole proprietorship works for one person, but once you have partners or investors, you’ll need an entity that allows for agreements and clear decision-making.

   
   

2. Sources of Capital – Will funding come from personal contributions, pooled partner funds, “sweat equity,” or outside investors? The type and source of capital often influence which entity is most practical.

   
   

3. Liability Protection – Sole proprietorships and general partnerships offer no liability shield. If you need protection for personal assets, a limited partnership, LLC, or corporation may be the better path.

   
   

4. Tax Considerations – Different entities are taxed in different ways, and state-level obligations matter too. For example, Tennessee imposes franchise and excise taxes on corporations, LLCs, and limited partnerships but not on sole proprietorships or general partnerships.

Example: Do I Need an LLC for My Rental Property?

This is one of the most common “quick” questions we get—and the truth is, the answer is never quick.

Since the primary purpose of an LLC is to limit personal liability for company acts and omissions, you first want to determine the likely size and source of the potential liability. Then, decide whether the risk of liability can be managed differently. For example, if you own a single rental property and carry a robust general liability policy (with coverage in the millions, plus optional umbrella insurance), you may already be well-protected against most claims. In some cases, this insurance alone provides an adequate safety net—without the added cost and ongoing filings of creating and maintaining an LLC.

That said, the decision isn’t always purely financial. After weighing the tax consequences and insurance options, some clients ultimately choose to form an LLC because it allows them to rest easier at night knowing their personal assets are protected from their rental activities. That peace of mind itself has real value, even if the actual risk is low.

In short: for some, insurance is enough; for others, the assurance that risk is fully contained justifies the investment in an LLC.

Work with a Business Law Attorney

Forming a business entity is more than paperwork—it’s an investment in your financial future. The right structure can protect your personal assets, reduce tax burdens, and set your business up for long-term success.

At Cook Tillman Law, we help Nashville entrepreneurs and business owners choose and form the right entity, plan for taxes, draft agreements, and even build succession plans. If you’re ready to start your business with confidence, we’re here to guide you.

Call us today at (615) 370-2444 or visit our website to connect about a referral or schedule a consultation.