Business Entity Selection Type An Important Issue

Business Entity Selection Type An Important Issue

| Jun 5, 2020 | Business Law |

Setting up a new business can be intimidating but legal resources are available to guide new business owners and entrepreneurs through the process of turning their dream into a reality. Selecting the best business form for the start-up or entity can impact much of what happens down the road so it is important to be familiar with the options available and know what to consider.

The type of business form chosen can impact how the business is run day-to-day and the control and management of the business; how it is taxed; the costs and regulations associated with running the business; and the personal liability of the business owners. As a result, it is not a decision that should be taken lightly but is also one that can help the business start out on the right foot for success.

There are generally four different types of business forms to select from:

  • Sole proprietorship: A sole proprietorship is the simplest business form. The sole proprietor business owner runs and operates the business and the earnings of the business are taxed on the sole proprietor’s personal tax return. A sole proprietorship does not provide personal liability protection for the business owner.
  • Partnership: A partnership is taxed similarly to a sole proprietorship, on the personal tax returns of the partners, but is typically governed by a partnership agreement which can impact the control each of the owners may have over the business and its day-to-day operations. Partnerships also do not provide personal liability protection to the business owners.
  • Corporation: A corporation provides personal liability protection but is more regulated and can be more costly to run than some other business types. Additionally, it is sometimes viewed as double taxed because the corporation and its shareholders are each taxed separately.
  • Limited Liability Company: A limited liability company, or LLC, provides personal liability protection and allows the business owners to determine if they want to be taxed as a corporation or a partnership which provides some flexibility to business owners.

Business law is an important resources for business owners to be aware of that can help guide them through setting up their business and any challenges they face down the road. By using business law resources, business owners can be proactive about the challenges they face and better protect their interests as their business develops and grows. Selecting the best business form to grow along with the business is an initial first step business law can help with.

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