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The Legal Organization of your Business
August 2, 2022
Coworkers in a business meeting

Choosing a Business Structure


What structure is best for your business?

One form of business structure is not necessarily better than any other. Each business owner must determine the legal organization based on his or her own needs. Your choice of business structure will affect how much you pay in taxes, the personal liability you face, and the amount of complexity that the legal structure entails. The most common forms of business structure are:

  • Sole proprietorship
  • Partnerships
  • Corporations
  • Limited Liability Companies (LLC)


Sole proprietorship

A sole proprietorship is a business that is owned and operated by one person. It is the simplest and least expensive business structure to form. Many start-up companies choose this form until it becomes profitable to enter into a partnership or corporation.  Profits from the business are taxed as part of the owner’s individual income.



A partnership is a business relationship between two or more persons. Each person contributes money, labor, skills, or property to the partnership. Each partner reports his share of the partnership net profit or loss on his personal tax form. Partners are not employees of the partnership and so taxes are not withheld from distributions. Like sole proprietors, partners need to make quarterly tax payments if they expect profits from the business.



A corporation is a separate legal entity from its owners, the shareholders. It can make contracts, it is liable for any obligations, and it pays taxes on earnings. It is a legal “person.”

A corporation attracts capital investment funds by selling shares of stock in the company to investors, or trading stocks for assets. Generally, stockholders are not liable for claims in excess of the current value of their shares. Corporate officers may become personally liable in some cases, but generally, creditors can only lay claim on the assets of a corporation.

Corporate income is taxed at its own rate. More attractive corporate business tax rates were set with the Tax Reform Act of 1986. The portion of corporate after-tax income given to shareholders as dividends is taxed again as the personal income of shareholders.

To incorporate, you must apply to the secretary of state by filing articles of incorporation. The secretary then grants a certificate of incorporation. The sale and exchange of stock are governed by state law, to protect the public investor, and special registration is needed to sell stock to the public. The name of the corporation must be approved by the secretary of state to avoid duplication. The state charges a one-time fee for filing the articles of incorporation with the secretary of state.

After receiving and filing the articles of incorporation and approving the corporate name, the secretary of state sends the document to the county recorder’s office in the county where the office of the registered agent for the corporation is located. The county recorder files the articles of incorporation in the county. There is a one-time charge for this service.

After the county recorder has filed the articles of incorporation, the corporation receives a certificate of incorporation from the secretary of state. The corporation can start doing business; right after the certificate of incorporation is issued by the secretary of state. The corporation must also print a notice of intent to do business in a newspaper with county-wide distribution to establish “good standing” in the county.

Articles of incorporation can be written by members of the corporation or a lawyer. However, using a lawyer or accountant can sometimes help you avoid many problems and pitfalls of establishing a legal corporation in Maine.

Dissolving a corporation in Maine requires two filings with the secretary of state: a statement of intent to dissolve and articles of dissolution.

Corporations are a more costly and complicated form of business organization than partnerships. Articles of incorporation must also be filed in counties where offices are located or real estate is held. Each year, an annual report must be filed with the state. There is a small charge for filing, but the fee goes up as the capital assets of the corporation increase.

Many sole proprietors feel they should incorporate to limit their business liability. This certainly is an advantage, but unless the assets of the business are substantial, the officer-shareholder may still have to sign for the business.

“S” corporation

The Subchapter S Corporation is a variation of the standard corporate structure. Entrepreneurs who decide on a corporate form of business may want to consider “S” corporate status. Besides limiting liability, tax advantages are a factor to consider for this option.

The “S” structure is a corporate form for smaller businesses that allows a tax burden to shift to shareholders. The “S” corporation is not taxed but must file an informational return. Income is given to shareholders and is taxable to the shareholders whether or not it’s distributed to them. Ordinary tax losses are also personal deductions.

Generally, an “S” corporation is exempt from federal income tax other than tax on certain capital gains and passive income. The “S” corporation is treated in the same way as a partnership, in that generally, taxes are not paid at the corporate level.

You set up an “S” corporation the same way you set up a regular corporation. The “S” structure merely allows for business profits to be taxed on personal income.


Limited Liability Company

The Maine legislature has recently approved a new form of business organization called a “Limited Liability Company” (LLC). The LLC form of organization combines some of the best features of the S corporation and the partnership forms of business. Limited liability companies enjoy the benefits of limited liability associated with S corporations, together with the flexibility of partnerships (in terms of taxation economics and number and types of owners). Contact the secretary of state to learn how to form a limited liability company in Maine.

202 Harlow St
Bangor, ME 04401
(207) 772-1147

Copyright © 2023 SCORE Association,

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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