Choosing a Business Entity
The type of business entity you choose will determine your personal and tax liabilities. Believe it or not, not choosing is a choice in itself when running a business. If you are a solo business owner, you are operating as a sole proprietor and if you have multiple business owners you are operating as a partnership. The biggest disadvantage to these entity types is lack of separation between your personal and business assets. A lawsuit brought against your business could affect your personal assets like your home.
Making the choice to register a business entity means you now have to choose between a corporation and a limited liability company. With the availability of a S-Corp in the corporation family, either entity type can be used with a flow through style of income to avoid double taxation at the corporate and individual levels. However, the two types are governed by different statues and for most small business owners, the LLC is the preferable business entity because of its flexibility and lack of formality. The LLC statutes are default rules that can be altered in the governing documents for your entity and don’t include formal requirements like forming a board of directors or holding annual meetings. However, most investors prefer the corporation model because they are used to the rules relating to the issuance of stock to investors. So if you plan on having major investors that aren’t people you have a personal relationship with, the corporation is the better choice even for the small business.
Additional options such as limited liability partnerships and professional corporations are available in most states so your best bet is to consult a business attorney to see which type of entity will work best for your business. Even if you already know which type of entity you want, forming the entity by filing the required form with your state office is the easy part. You still need to have some form of corporate documents that lay out how the entity will work, pay, grow, change and eventually dissolve or merge.