Choosing a Business Entity – Some Questions to Consider

Everyone in business has selected the “business entity” under which they operate.

For many it was an unconscious decision. We could say their business entity selected them. They simply began selling their products and/or services, without doing anything, and presto – they were a proprietorship.

Like it or not, know it or not, they are personally liable for all of the debts and other obligations of their business, including judgments stemming from law suits.

Since the consequences of a poor choice can be very serious, selecting your business entity by default is unwise.

So, should it be a proprietorship, partnership, C corporation, S corporation or Limited Liability Company (LLC)? We can’t answer that question for you, but we can suggest some questions you should think of as you consider the options.

About You

• What are your personal assets?
• What are your personal liabilities?
• What is your personal tax situation?
• How important is it to protect yourself from personal liability?

About the Business

• What kind of business is it?
• How big will it be initially?
• How fast will it grow?
• In what area will it operate?
• Who will your customers be?
• How will your customers be served?

About the Cost

• What will the initial startup costs be?
• What licenses and other fees will be required?
• What will the location for the business cost?
• What will the ongoing operating costs be?

About Funding

• Will your personal assets adequately fund the business?
• Can you personally borrow sufficient funds?
• Do you have family, friends or others as ready investors?
• Will you have to attract outside investors?

With so many factors that can affect your decision, selecting the business entity that is best for you deserves your serious consideration. Following are some general observations we hope you find helpful.

Why incorporate now?

If you have adequate assets and don’t need to attract other investors, you could decide to start out as a sole proprietorship because it will be inexpensive and easy. You can always incorporate or form an LLC later, after you get bigger.

However, the fact that you have adequate assets suggests there may be a real need for the limited liability protection offered by a corporation or LLC, particularly if your business is one where your customers might sue claiming they were harmed by your products or services or that they were injured while on your business premises. And of course in our “sue everyone” society, bigger assets mean a bigger target.

While some risks can be covered by insurance, it could make sense to go ahead and incorporate from day one, particularly if outside investors are at some time likely.

Financial advantages of incorporating

The need for outside investors brings into focus some of the more significant advantages a corporation can provide. Almost certainly, shareholders will insist that their personal assets be protected by the limited liability offered by a corporation. Potential investors, employees and customers generally perceive a corporation to be more substantial than other types of businesses. And additional capital is more easily raised by selling stock or other financial instruments.

There are also tax advantages offered by incorporation. Even with “double taxation” (on dividends paid), C corporations can facilitate the accumulation of capital as retained earnings since corporate tax rates are generally lower than those of individuals.

On the other hand, if losses are anticipated during the initial years, election of S corporation status, with pass-through taxation, would benefit shareholders by allowing them to offset other personal income with their share of the corporation’s losses.

We’ve only scratched the surface by suggesting some of the factors to be weighed when determining which business entity will best serve your needs. These, as well as others, should be considered. And don’t neglect a look into your crystal ball as you try to envision what the business will look like in 5 years, 10 years and beyond.

Learn more about choosing the right business entity

We have prepared additional information designed to help you compare the different business entities. A Basic Comparison of Business Entities is a chart that will help you quickly see key characteristics of the different business entities while our Overview of Business Entities delves deeper into their characteristics. You may also want to see even more detailed information about C Corporations, S Corporations and Limited Liability Companies (LLC’s).

Covering all of the bases is no small task but it is one that will be easier and more productive if you involve your attorney and accountant. They are professionals who know specifically about you and your business as well as being aware of the laws and regulations of the applicable jurisdiction.

At MaxFilings, you can incorporate your business right away… or just start organizing all your information here until you’re ready! Start here today >>