Do's and Don'ts: Choosing a Business Form
Once you make the decision to start your own business, there are several steps to take early in the process. These include creating a business plan, figuring out how you will finance the business, and selecting a business name. Another one of the initial steps of starting a business is choosing a business structure.
There are several different business forms — also called business structures or legal structures — each with its own advantages and disadvantages. This article provides information to help you choose a business form.
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Legal Structures: Overview
Choosing a business structure is very important because it will determine your personal liability as the business owner and tax obligations. There are several types of business structures, the most common being sole proprietorships, general partnerships, corporations, and limited liability companies (LLCs). A sole proprietorship is the most simple business form and enjoys pass-through taxation, but doesn't protect the business owner from personal liability. A general partnership is similar to a sole proprietorship, except that there are two or more owners.
A corporation, on the other hand, is probably the most complex business form but provides the owners with the most protection from liability. Aside from being complex, a corporation is also subject to double taxation. A limited liability company is a more recent development and has some of the best aspects of sole proprietorships and corporations; LLCs provide protection from liability and enjoy pass-through taxation. While LLCs do not require as many formalities as corporations, there are still certain requirements to forming and maintaining LLC status.
- DO know the tax and personal liability consequences of a business entity before making your choice.
- DO develop a business plan. Your business plan may dictate the options you have in choosing a business form.
- DO strictly meet the state requirements if your business entity is required to file organizing documents with the state.
- DO ask your attorney if something doesn't make sense. Your attorney works for you, and should help you understand every part of the business start-up process.
- DON'T begin operating your business before determining its form. Operating as a sole proprietorship with the intention of forming a limited liability company or a corporation will not shield you from being personally liable for any obligations or debts prior to the formation of a limited liability company or a corporation.
- DON'T assume that the business entity you choose is authorized to do business in other states as well. While a sole proprietorship and general partnership may be able to do business in other states fairly freely, other business entities may not even be recognized outside of their home state. This strips away the protections that the business entity provides its owners. At a minimum, limited partnerships, limited liability companies, and corporations need to register in the states where they will conduct business.
- DON'T panic. Choosing a business form can be complicated. An attorney can make sure that you choose a business entity that is right for you.
Get Legal Help When Choosing a Business Form
If you would like to learn more about different business structures and would like some guidance on which one would be best for your business, you may want to contact an experienced business organizations attorney in your area. You can also learn more through our DIY business formation service.
For more information and resources related to this topic, you can visit FindLaw's section on Incorporation and Legal Structures.
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Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.