Module 01 of 07
Business structure and liability
Choosing a business structure is one of the first legal decisions you make — and one that's surprisingly easy to get wrong by default. Most people start as a sole proprietor without realizing it. That matters more for physical businesses, where customers can slip and fall, disputes with landlords arise, and equipment can cause damage. Your structure determines whether those problems stay in your business or follow you home.
The three structures most small businesses use
Click a structure to see what it actually means for a physical business owner.
In this Module
The three structures
Why physical businesses face more risk
Forming an LLC
Maintaining your protection
Real-world example
Related Modules
Business insurance
Licenses & permits
Money & finance
Why physical businesses face higher liability
Online businesses rarely have customers in their physical space. Physical businesses do — constantly. Every person who walks into your store, eats at your food stall, or hires you to work in their home is a potential liability event.
Common liability scenarios for physical businesses: a customer slips on a wet floor; a product you sell injures someone; a contractor you hired damages a client's property; a fire in your kitchen spreads to adjacent businesses; a market vendor's pop-up tent collapses in a storm. None of these are unusual — they happen regularly to small businesses.
The real risk of staying a sole proprietor
If your customer slips and falls, they sue you personally — not a business entity. That means your personal bank accounts, your car, and potentially your home are on the line. An LLC with proper insurance is not expensive insurance against this scenario. It's basic risk management.
Real-world example
Danielle opened a gift shop as a sole proprietor. A customer tripped over a display and broke her wrist — and sued for $45,000. Because Danielle had no LLC, the lawsuit named her personally. Her homeowner's insurance didn't cover commercial activity. She eventually settled for $22,000 out of pocket. Had she formed an LLC and carried general liability insurance, the insurance would have covered the defense and settlement.
Forming an LLC: what’s actually involved
An LLC is a state-level filing. The process is straightforward but varies by state. Here's what's typically involved.
Choose a name. Your LLC name must be unique in your state and include a designator like "LLC" or "Limited Liability Company." Check availability on your state's Secretary of State website before you get attached to a name.
File Articles of Organization. This is the document that legally creates your LLC. Most states let you file online. Cost ranges from $50 (Kentucky) to $500 (Massachusetts). The national average is around $130.
Get an EIN. An Employer Identification Number is your business's tax ID. It's free and takes about 5 minutes on the IRS website. You need it to open a business bank account and pay employees.
Create an Operating Agreement. Not required in most states, but strongly recommended. This document defines how the business is owned, how profits are split, and what happens if a co-owner wants to leave. Single-member LLCs should still have one for legal clarity.
Open a business bank account. This is required to maintain the liability protection you just created. Mixing personal and business funds — called "piercing the corporate veil" — is the most common way LLC protection gets thrown out in court.
What it actually costs
For most small business owners, forming an LLC costs $100–$200 in state filing fees plus $100–$300 in annual registered agent fees if you use a service. You can often serve as your own registered agent, which saves the annual fee. Total first-year cost is typically under $300.
Maintaining your protection after formation
An LLC is not a set-it-and-forget-it protection. Courts can "pierce the corporate veil" — setting aside the liability protection — if you don't maintain proper separation between personal and business activity. The most common ways this happens:
Commingling funds — paying personal bills from the business account, or using personal funds for business expenses without reimbursement. Always run business income and expenses through the business account.
Failing to document decisions — for multi-member LLCs, significant decisions should be documented in writing. Single-member LLCs need this less, but good records still matter.
Missing annual filing requirements — most states require an annual report and fee to keep your LLC in good standing. Missing this can result in administrative dissolution, wiping out your protection retroactively.
The maintenance checklist
Use a dedicated business checking account for all income and expenses. Pay yourself via owner's draw or payroll — not by dipping into the business account. File your annual state report on time. Keep your registered agent information current. Renew your business license each year.