Business Entity Formation: Four Questions to Consider

When deciding how to structure your business, there are different criteria that you need to take into account. Everyone’s situation is different, and the ideal solution for one aspiring business owner may not suit the circumstances or goals of someone else.

Below are four questions that you need to consider, as the answers will determine which entity type is recommended for you.

  1. To what extent do you need protection from legal liability? If yours is a business that lends itself to potential liability, can you personally afford the risk? If not, you should refrain from forming a sole proprietorship or even a partnership. A limited liability company (LLC) or corporation is almost certainly a better option.
  2. What are the opportunities to limit taxation, given your current situation and goals? If taxation is a big concern, corporations have a wider range of options available than sole proprietorships or partnerships. To avoid double taxation, you can form an entity with S incorporation status if there will be fewer than 70 shareholder returns. If the company experiences any losses during its formative years, they can help reduce your personal tax liability.
  3. Can you afford the costs of conducting business as a corporation? Corporations are obligated to maintain detailed records and complete more paperwork, which takes time and money. The incorporation process itself can also be expensive. As the owner you will be required to manage administrative requirements associated with corporations, potentially leaving you with less time to grow the business.
  4. What are your future needs? When you start out, it’s normal to be so focused on getting the business off the ground that you don’t give a lot of thought to what it will look like five or ten years from now. But the future needs to be considered. What if you decide to sell later on? Do you want the business to keep running when you are no longer able to remain involved? Sole proprietorship or partnerships may dissolve if the owner or owners die, but a corporation can be easily distributed to family members or other designated heirs.

Making the right decision will require you to carefully assess the needs of the business and the owner or owners. Once you answer all necessary questions, you’ll be in a better position to make that call. Please contact me today if you’d like help with this decision!

Integrated General Counsel
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