Choosing Your Business Structure

When you are starting a business, it is important to choose the appropriate legal structure for your business. This decision impacts, among other items, the ownership of the business, insurance requirements, how your business is managed, the taxation of the business, the personal liability you may face, how your business may be sold in the future, and the filings and other actions necessary to start your business as well as to maintain it in good standing over time. We suggest that you make this decision in tandem with your accountant and attorney so you understand these serious implications on your business.

Types of Business Entities

• A sole proprietorship offers total managerial control to the owner. The sole proprietor personally retains the profits, but is also personally liable for the losses of the business.
• A partnership involves two or more people who agree to share in the profits or losses of a business. Each partner is personally liable for the financial obligations of the business.
• A corporation is a legal entity, formally organized under an enabling statute, which is created to conduct business and can be held legally liable for its actions and financial obligations. The corporation is owned by shareholders who are shielded from certain personal liability.
• A limited liability company (LLC) is a hybrid entity that permits profits and losses to pass through to owners, known as “members,” without taxation of the business itself (unless the members opt for the LLC to be treated as an S corporation). A limited liability company is managed by its members or a member-appointed manager, and the members are shielded from certain personal liability.

Factors to Consider

1. The nature and number of participants;
2. The degree to which the participants will actively be involved in the business;
3. The personal economic status of the participants and the degree to which they are averse to risk;
4. Special characteristics of the business operations;
5. Cost of formation and required maintenance;
6. Tax consequences to the business and its participants; and
7. Short- and long-terms performance goals.