Choosing a business form can be complicated and confusing for excited and hopeful entrepreneurs. It does not have to be, however, if the new business owner understands the different options and what they mean for their new business venture.
Considerations when selecting a business form
The best business form should be selected based on an evaluation of the tax implications of the business form, its impact on control of the business, personal liability implications of the selected business form, the cost of running the business and regulations associated with the business form and the ability to access capital based on the business structure.
A sole proprietorship is the simplest business form that gives the business owner the most control over the business. It does not provide any personal liability protection. The business owner is taxed on their personal income tax return when they select a sole proprietorship as their business form.
A partnership shares control between the partners according to the partnership agreement. Partners are also not protected from personal liability and the business earnings are taxed on the personal income tax forms of the partners.
A corporation is a more regulated business form and can be more costly to operate as a result. It provides personal liability protection for the owners or shareholders but is sometimes considered double taxed because the corporation will pay taxes on its earnings as will the owners or shareholders.
Limited liability company
A limited liability company provides personal liability protection for its members who can also select if they wish to be taxed as a partnership or as a corporation.
The importance of selecting a business form should not be overlooked because it will impact the business right away and down the road. Understanding how the business formation process works can help the new venture start off on the right foot.