There are many important decisions that must be made when starting a business and what entity form to choose for the business is one of them that is high on the list. Entity form selection can have significant liability and tax consequences which is why it is important to thoroughly understand the options available and the implications of selecting an entity form.
There are several considerations that may be taken into account when choosing an entity form which can include the anticipated size and nature of the business; expected profits or losses for the business; the need to reinvest earnings into the business; the need to access cash from the business; the level of control the business owner wishes to maintain over the business; the amount of structure the business owner wishes to operate under; vulnerability to liability concerns; and tax implications associated with different business forms.
There are several common business structures to choose from, including a sole proprietorship, a partnership, corporation, S corporation and limited liability company (LLC). There may be paperwork and a variety of different forms that must be filled out depending on the entity form selected. In addition, registration requirements and different requirements on both federal and state levels may also apply. When determining the best business structure for a business, it is important to consider current needs but also think ahead to the future and growth plans for the business.
Business formation is an important step in the process of starting a business and must be carefully considered. In addition, entity form considerations can lead to ongoing considerations for the operation of the business. Exposure to the variety of business formation options and implications will allow a business owner to make thoroughly informed decisions that will benefit the business and its future success.
Source: Minority Business Development Agency, U.S. Department of Commerce, "Choosing a Business Structure," Accessed Feb. 21, 2015