Whether you are thinking about starting a business or changing the structure of an existing business, understanding something about common business structures is important. The most common business structures are the Sole Proprietorship, Partnerships, Limited Liability Companies (LLC's) and Corporations. Each has different pros and cons and implications for a business.
It's the simplest of all legal entities to get started; basically someone decides to start a business and that's it. It's popular because it easy to get started: register your business name and get any necessary local licenses. Pros - it's easy (basically instantaneous) and cheap to get started; little, to no ongoing formalities. Cons - major problem with a sole proprietorship is that the owner is subject to unlimited personal liability for the actions of the business; can't raise capital by selling interests in the business.
Similar to sole proprietorship, but with more than 1 person; they can, and often are, formed with nothing more than a handshake. It's important to make sure a partnership agreement is drawn up that details everyone's rights and responsibilities. Pros - again, it's easy (basically instantaneous) and cheap to get started, little, to no ongoing formalities. Cons - partners are subject to unlimited personal liability for the business; individual partners can be liable for the actions of other partners.
LLC's offer owners (they are called "Members") limited liability from company debts and obligations, usually keeping personal assets out of reach. The are formed by filing the appropriate paperwork with the state, and then setting up the appropriate internal document, such as an operating agreement. It's a very flexible business structure that works well for many small companies, and single member LLC's are allowed. Pros - limited liability; minimal formalities; flexible tax setup. Cons - difficult to raise money from capital markets; more reporting requirements than sole proprietorship and general partnerships.
Owned by shareholders, it also provides owners with limited liability from company acts. Corporations also require filing with the state in order to get started, and it has the most reporting requirements and formalities of any business structure. Typically, corporations have by-laws that dictate the rules and guidelines for the business. Pros - limited liability for owners; easiest way to raise investment capital; can have an unlimited lifespan. Cons - requires formalities of owners; more expensive to set up.
This is a general rundown of the most common business structures. They all have pros and cons, so make sure to carefully determine which entity works best for what you are trying to do, but remember it's always a good idea to try and avoid personal liability where possible.