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What Type of Business Entity Should You Choose?

What Type of Business Entity Should You Choose?

When starting any type of business, there are some very important decisions that must be made – starting with what type of entity the company will take on legally. Here, each business entity will have particular benefits – depending upon how the business owner intends to manage the company, structure it, and deal with taxes.

Types of Business Entities

There are several structures that a business may take. These include:

  • Sole Proprietorship
  • Partnership
  • Corporation
  • Limited Liability Company (LLC)

The structure that a business assumes is also important in determining the limitations and the liabilities of the company. Therefore, depending on the type of structure that is chosen, specific paperwork will typically also be necessary.

Which Type of Business Entity Will Work Best?

Choosing the best way to legally structure your company is one of the most important decisions that you can make. No single business structure will be able to suit every kind of business. So, considering the owner – or owners, their financial condition, and what activities the business will be engaged in, you must determine whether the requirements will be best met by one type of entity over another.

There are generally four key areas of concern to factor in when determining the right type of business entity. These include:

  • Potential Liability – Regardless of what type of business you own, potential liability is a major concern. Nobody knows when an unexpected turn of events will cause issues – potentially resulting in the business, and its owner, to lose everything. Therefore, protection of personal assets from judgments or other legal obligations can be a serious factor to consider.
  • Income Taxation – Certainly, income taxes are a concern for both individuals and for businesses. In general, “pass through” taxation will apply to some forms of businesses. With these entities, all of the profits and losses will pass through the company to the owner(s) or members who report their share of the profits – or deduct their share of the losses – on their personal income tax returns.
  • Investment Needs – Investment needs can also determine whether or not a business should be incorporated. A corporation’s stock can make it easier to raise investment capital, as well as to transfer company ownership shares. In addition, stock options and stock bonuses may also be used for attracting and retaining quality employees to the company.
  • Cost to Establish and Maintain the Entity – The cost of establishing and maintaining a business should also be considered before deciding upon what type of entity the company will take on. While some forms will require higher costs and fees to establish, they could also provide benefits in terms of taxation and legal issues.