No matter if it’s your first company or fifth, choosing the right entity is a crucial aspect of the business formation process. This selection could have a profound effect on the organization’s growth potential and financial success in the future. It is important to carefully evaluate the business plan, future expectations and tax implications of various business structures.
Business formation is often an exciting and overwhelming period. Individuals can become consumed with activities from drafting operational documents and employee handbooks to creating a web presence and succession planning. In many ways, however, this all takes a backseat to the selection of the right entity. Most often, the choice revolves around several possibilities, including:
- Sole proprietorship: These are generally the easiest business structures to set up because there are limited paperwork requirements and few owner/operators – generally a single individual or a married couple. Unfortunately, there is little to separate personal finances from business finances, so the sole proprietor could potentially face tax liabilities and legal troubles down the line.
- Partnership: In a general partnership (GP), all partners are involved in the ownership, management, profits and losses of the business. In a limited partnership (LP), ownership is divided. There are partners who operate the business and assume liability while there are other partners who only act as investors and are generally shielded from liability.
- C corporation: In a C corporation, business owners face regulatory compliance on several fronts including tax laws. The owners do not face personal liability for business debts, but these entities are generally more expensive to develop.
- S corporation: In many ways, an S corporation is similar to a C corporation. This business structure retains the same type of limited liability, but the entity acts as a pass-through for tax purposes. In essence, the business finances pass through to the owner’s personal tax returns.
- Limited liability company: The limited liability company (LLC) takes numerous positive features from other business entities. Owners can take advantage of limited liability and face less paperwork requirements than other structures. Many freelance workers or small businesses choose an LLC structure
Even with a strong understanding of the different business structures, many people seek the guidance of a skilled legal professional. An attorney can provide insight and information uniquely tailored to fit a business owner’s needs both in the present and based on future goals. Each business entity carries pros and cons that could dramatically impact the course of the organization’s early days and future success. It is important to match these costs and benefits with business goals before choosing an entity.