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How to choose the right business entity for your startup

When starting a new venture, how do you select the right business entity? These considerations will help inform your decision.

Countless considerations come into play when starting your own business. Chief among them is the legal structure. Your choice of business entity will have a significant impact on the success of your enterprise.

Key factors to consider when forming a business include:

  • Liability: How important is it to shield your personal assets from business liabilities? Are you willing to give up other benefits to obtain this protection?
  • Financing: Some business entities require higher startup costs. However, those entities may have a leg up when it comes to securing financing through investors or lenders.
  • Transferability: Do you want to be able to readily sell your interest in the business? Do you want to pass it on to future generations?
  • Flexibility: How much control do you want over the business? Do you want a flexible, informal governance structure or a more rigid one?
  • Administrative complexity: Are you willing to invest the time and effort to keep diligent records? Can you stay on top of legal notices, filings and other paperwork?
  • By addressing these considerations, you can make a better-informed decision about the future of your enterprise.

Four common types of business entities

Each type of business entity involves advantages and disadvantages. Below are some of the most prevalent types of business formations and the pros and cons of each.

Sole proprietorships

Unless you form a different entity, your business will be a sole proprietorship by default. This means it will not be treated as a separate legal organization. Nor will it be subject to separate taxation.

A sole proprietorship gives you enormous flexibility and complete control. However, you will also have complete liability. As a result, you may find it more challenging to raise capital and secure funding. It may also be more difficult to transfer or sell the business later on.

Corporations

A corporation exists as a separate legal entity, complete with its own legal rights and responsibilities. When properly maintained, a corporation will protect your personal assets from liabilities of the business.

Corporations do have a major downside: taxation. Depending on the type of corporation you form, you may be subject to double taxation.

Corporations also typically require a larger investment to get off the ground. However, they can open the doors to a greater array of financing options.

Partnerships

A partnership is simply two or more people doing business together. The foundation for a successful partnership is a carefully drafted partnership agreement. Because you can set the terms of the agreement, a partnership can be an extremely flexible entity.

Partnerships are not subject to the burdensome taxation of a corporation. Unless it is a limited liability partnership (LLP), however, this arrangement will not shield your personal assets from liability.

Limited liability companies (LLCs)

An LLC offers the benefits of a corporation without the disadvantages. Like a corporation, it provides complete personal liability protection. However, you must properly maintain the company to take advantage of its protections.

With an LLC, you have some degree of flexibility in how to structure the business. You can create different classes of ownership with different rights and duties.

Explore all your options

This is just a sampling of the most common business arrangements. Many other forms of conducting business - such as joint ventures and nonprofit organizations - inhabit the legal landscape. The possibilities are nearly limitless.

At The Law Office of Philip B. Vinick, we can help you weigh the pros and cons to select the entity that best suits your business.

Keywords: business organizations, business formations, startups, business law, starting a business, business entity, enterprise, business strategy, LLC, corporation, partnership, sole proprietorship