Best Business Structure for Small Businesses in 2025

Starting your first business in 2025 is an exciting journey, but choosing the right business structure can be daunting, especially for international expansion.

Many entrepreneurs overlook the risks of selecting the wrong entity type, like a sole proprietorship or LLC, which can lead to personal liability, double taxation, and international compliance issues.

Deel is here to help. With extensive expertise in entity establishment, payroll, HR, and global compliance, we’ve supported thousands of businesses in streamlining their setups and expanding internationally with confidence.

Leveraging Deel's Entity setup and Employer of Record (EOR) services can help you achieve quick market entry, ensure compliance, and scale smoothly.

Partnering with Deel allows small-to-medium businesses to enjoy long-term stability, optimized tax strategies, and simplified administration, enabling success in local and global markets.

What are the different types of business structures?

Common legal structures for entity setup include:

• Sole proprietorship: Ideal for small businesses with one owner seeking simplicity and minimal startup costs. However, personal liability is a concern
• Partnership: Formed when two or more individuals join forces to run a business. Partners share profits, losses, and liabilities
• Limited liability company (LLC): Offers a balance of liability protection and flexibility in management. Members also don’t get taxed twice like some other structures
• Corporation: Provides the highest level of liability protection, but there are more formalities and administrative requirements
• Employer of Record (EOR) model: This model enables you to hire employees through a third-party organization across different regions. The EOR model is best for small organizations that lack the upfront capital for entity setup or the tax compliance risks that come with testing new markets and expanding abroad

Factors to consider when choosing a business structure

While different countries and industries have unique considerations, here are the main factors to be aware of when deciding which business structure to use:

Location

Regions have different business structures, meaning you might be unable to set up some corporations everywhere you operate. For example, S corporations are only available in the US. Other places may have a similar structure, but nowhere else allows you to use this specific type of entity.

States and countries also have varying regulations, fees, and benefits. Some offer small businesses tax advantages, while others have high establishment costs or lengthy setup processes.

For instance, the UK and Singapore are favorable locations for LLCs due to their straightforward setup processes. Even foreign business owners can incorporate within days. On the other hand, the German GmbH (the country’s equivalent of the LLC) has high upfront costs, requires a lot of administration, and takes weeks to set up.

See also: Business Expansion Strategy: Plan & Execute With Our Guide

Tax implications

Your choice of business structure determines:

• Which rates you pay
• How profits get taxed
• What tax advantages you’re eligible for
• Who’s responsible for payment
• Whether you pay personal or corporate taxes or both

Sole proprietors and partnerships tend to report income on personal tax returns. While this setup is relatively straightforward, owners may find their tax burden increases disproportionately with their profits.

Other types of corporations tend to enjoy more favorable tax rates. However, owners may be subject to double taxation, where they pay taxes on both corporate and personal income.

All business structures are at risk of double taxation when operating abroad. The only way to avoid triggering permanent establishment is to use the EOR model to hire and pay workers where you don’t have legal entities.

Operational dynamics

The way you plan to run your company has major implications for your choice of business structure.

If you have a single owner and intend to keep operations simple, a sole proprietorship should suffice. However, this structure can be limiting for businesses with any kind of complexity.

Many business owners opt for what’s known as a limited liability or private limited company. You can install multiple owners and establish a formal corporate structure without an excessive administrative burden. Namely, you don’t have to meet stringent reporting and disclosure requirements — although this varies widely across locations.

Fast-growing companies should consider the EOR model. You can scale your workforce up and down quickly as you enter new markets and expand operations more rapidly than through owned entities. When you’re ready for the next step, services like Deel can help you fully incorporate.

Liability protection

One of the biggest reasons entrepreneurs form corporations is to protect personal assets from business debts and legal claims. That means if your company faces financial or legal difficulties, the authorities can’t use your savings to cover any losses.

If you’re in a high-risk industry, choosing a business structure with limited liability is crucial. You’re more likely to experience financial losses from legal claims or financial mismanagement. For example, even the most successful healthcare companies have to manage a lot of malpractice suits, and construction companies have a high chance of injuries and contract disputes.

Investor preferences

If you’re seeking outside funding, your choice of business structure can impact how you manage investors. For example, private limited companies can only issue shares to a small group, and transfers can be complex. Corporations can issue more freely, making it easier for investors to enter and exit.

Your business structure also affects your appeal. Venture capitalists are more likely to invest in a corporation when they can easily manage equity. As they’ll want to minimize their risk, they’ll also prefer a business with limited liability.

How do you know if you’re ready to establish a legally recognized business structure?

Registering your business entity can indicate stability and growth, but it’s also quite complex and costly.

Be prepared for the following:

Cost analysis

Establishing a legal entity involves some expenses. You’ll need to pay for things like registration fees and legal consultations. Maybe even hire lawyers or accountants to ensure everything is done correctly.

Use our entity setup calculator to determine your total costs.

See also: Top 5 Hidden Costs of Setting up A Foreign Subsidiary

Complexity of legal requirements

The legal landscape can be a maze, especially for first-time business owners. Different countries and regions have different rules and regulations regarding business structures.

Time investment

You can’t rush the whole legal entity setup process.

There’s a lot to do—researching, completing the necessary paperwork, and handling government processes. Waiting periods for approvals or registrations may also add to the overall timeline.

Risks and compliance issues

Ensuring compliance is another crucial aspect. Failing to do so can lead to fines, legal disputes, or even your business’s dissolution.

Small businesses often find that their limited resources prevent them from establishing entities as they can’t fund expansion while managing compliance. An EOR can help you minimize HR and legal costs, creating a lower barrier to market entry.

You’re not locked into this arrangement. Deel can even help you establish a local entity when your business has reached the right growth stage.

Here’s what Joey Leung, Director of Strategic Alliances at BBMSL, has to say about partnering with Deel:

Next steps in the process

Once you’ve settled on a structure, here are the next steps:

1. Pick a name

Your business name should reflect your status or the products/services you provide.

Here’s what you need to know, depending on your type of business:

• For sole proprietorship: You can use your own name or choose a made-up name. If you opt for a made-up name, you’ll need to file a doing business as (DBA) form to operate under that name.
• For LLCs: Your business name should end with “limited liability company” or “LLC.” You can also use abbreviations like “Co.” or “Ltd.”
• For corporations: Naming rules for corporations vary by country. Typically, your name must include terms like “incorporated” or “Inc.” to indicate it’s a corporation.

Before finalizing your name, check an official database of registered business names to ensure it’s not already in use. Consider registering a federal trademark to protect your business name.

2. Complete the paperwork

Next, it’s time to handle the paperwork, which varies depending on your business type and location.

Here’s what you might need to do:

• Registration: This is the process of officially recording your business with the relevant authorities
• Licensing: Certain businesses require specific licenses to operate legally. These licenses ensure that your business meets certain standards and regulations
• Permits: Depending on your business activities and location, you may need permits for things like construction, signage, or health and safety
• Zoning clearance: This ensures that your business location complies with local zoning laws and regulations

In certain jurisdictions, you may need to create additional documents, such as partnership agreements, articles of incorporation, or operating agreements.

For instance, in Europe, you’ll have to file articles of association (or memorandum of association) outlining the company’s purpose, structure, and rules for operation. Similarly, in the US, you might need an employer identification number (EIN) from the Internal Revenue Service (IRS).

3. Finances and taxes

Think about where you’ll get the money to run your business. Knowing where your money is coming from — personal savings, bank loans, investors, or crowdfunding — is crucial for accurate tax calculations.

Once funded, establish payment processes for customers, including credit cards or PayPal, and implement systems for revenue tracking.

You should set up a separate business bank account even if you’re running a sole proprietorship without a separate legal entity. This makes it easier to keep track of your expenses and business income.

Let’s not forget about the tax implications of running a business. Think required forms, deadlines, deductions, and credits.

You’ll need to submit annual tax returns to report your business income. However, tax rules can vary from country to country, so staying updated is important to avoid penalties.

For example, most Emirates in the UAE do not impose corporate income tax. In contrast, the UK taxes the profits of resident companies at the main rate of 25% if they make a profit of more than £250,000.

4. Insurance

It’s easy to forget about insurance, but you must consider keeping your business, assets, and reputation safe.

Here are some key types of insurance you might need:

• General liability insurance: This helps protect your business if someone claims it caused them harm, like damaging their property or causing them physical or personal injury
• Commercial property insurance: If you own or rent property or equipment for your business, this insurance can help cover any damage to them
• Professional liability insurance: If someone claims your business messed up its services, this insurance can help cover legal fees and settlements
• Workers’ compensation insurance: If you have employees, this insurance is crucial. It helps cover their medical bills and lost wages if they get hurt on the job

Global HR solutions like Deel can help you select and administer insurance for your workforce compliantly. We have teams in over 150 countries, so we can always find you the best local packages.

5. Hire and pay employees

Once you start hiring and onboarding employees, you must withhold and pay payroll taxes. To avoid this burden, consider partnering with a global payroll provider like Deel.

Discover how Mynewsdesk saves 120 hours monthly with Deel’s Global Payroll.

Entity or EOR, you can do it all with Deel

Whether you’re looking to establish a local or international presence for compliant hiring or are considering an EOR, Deel is your solution. It’s a global platform designed to streamline the process of hiring, paying, and managing your global workforce.

Deel provides Entity Setup services and Global Payroll solutions for small to medium-sized businesses looking to establish their own legal entities. For those not ready to take that step, Deel EOR offers a simplified approach to international expansion.

Moreover, Deel offers the flexibility to mix and match its services according to your needs. You can leverage the Deel EOR model for specific locations, run Deel Global Payroll through your own entities in others, or even engage independent contractors through Deel Shield for compliant and convenient contractor management.

Plus, you’ll receive support at every stage of growth. We recommend starting with the EOR model to test new markets and hire a few employees in a country. Later, when you’re ready, Deel can assist you in setting up a legal entity.

Whatever your chosen approach, you’re never stuck with Deel because we can simply transition you into a different setup with our range of services.

To discuss your options with an expert, book a 30-minute demo with our team today.