entity_types

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So you’ve made the decision to go out on your own and start your own business.  Great!  It’s an exciting and scary time.  Along with your business name, a product / service concept, and a source of startup and working capital, one of the first decisions you need to make is the entity type that your new business (whether a small business or large) will adopt.

As you read this post, consider the options carefully, but always be sure to consult an attorney and an accountant before finalizing your decision.  Professionals in these fields should take the time to explain your options to you and be sure you understand them before making your decision.

To aid you in your understanding of your options, consider these three things when choosing a legal form:

  • Liability:

Legally, corporations are their own entities. As such, the corporation — not individual shareholders — are responsible for the actions of the business. In other words, if something goes very wrong, and a corporation is sued, only the assets of the corporation are at stake — not the owners’ personal assets. (There are some exceptions to this rule, but generally, your personal liability is greatly limited.)

  • Double taxation:

No one likes paying taxes, and you certainly don’t want to pay taxes twice — once on income for the business and then again when that income is distributed as profits to you. Instead, look for a legal form that allows for the profits of the company to “pass through” to the owners, without having to pay corporate taxes first.

  • Ownership

Certain legal business forms limit the number or type of people who can invest in your company. If you’re seeking a large number of investors or international investors, find a corporate structure that permits such stockholders.

There are several types of entities to choose from, each with their own set of advantages and disadvantages.  Depending on your goals and some other considerations, certain types are a better fit.  The entity types to choose from are:

Sole Proprietorship

General Partnership

Limited Liability Partnership (LLP)

C Corporation

S Corporation

Single Member Limited Liability Corporation (LLC)

Multi-member Limited Liability Corporation (LLC)

We have created a handy chart for comparing the different entity types, including their advantages and disadvantages, as well as suggestion on the best fit in which situation.  Click here to receive your free copy.

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