Of all the choices you make when starting a business, one of the most important is the type of legal structure you select for your company. Not only will this decision have an impact on how much you pay in taxes, it will affect the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money.
Types of Business Entities
The type of business entity you choose will depend on three primary factors: liability, taxation and record-keeping. Here’s a quick look at the differences between the most common forms of business entities:
A Sole Proprietorship is the most common form of business organization. It’s easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
A Sole Proprietorship is the most common form of business organization. It’s easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
A Corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that’s required.
A hybrid form of partnership, the Limited Liability Partnership (LLP), is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.
Selecting a Business Entity
When making a decision about the type of business to form, there are several criteria you need to evaluate. Kalish and EnviroTech co-owner John Berthold focused on the following areas when they chose the business format for their company:
- Legal Liability
- Tax Implications
- Cost of Formation and Ongoing Administration and Compliance
- Flexibility
- Future needs