From the beginning, your business has specific goals. However, the way that the government taxes your business, your responsibility for any debts your business acquires and your ability to find investors can depend on the legal entity you choose when forming your business. Achieving your goals often starts with choosing the right business entity. Which option is right for you?
Sole proprietorship
When you establish a sole proprietorship, you are personally responsible for all a company’s expenses. This makes decision-making simple, and formation can often be a straightforward and swift process. However, because you and your business are a single legal entity, this structure can also make your personal and professional finances more difficult to handle.
Partnership
Like a sole proprietorship, you will be responsible for your business’s finances. However, you will share that responsibility and decision-making power with the other partners in the business. It is also possible in a partnership to involve investors in a limited partnership, giving them less authority in the business than the general partners but involving them through their investment.
Limited liability companies (LLC)
LLCs create a clear division between your personal finances and your company’s finances and establish a more formal structure than sole proprietorships or partnerships. You will not be responsible for the company’s debt, and your pay as an owner will come from a share of the company’s profits.
Corporations
Corporations create even more division between the company and its owners. Because the corporation will be regarded as a legally separate entity, you can further limit your liability for the company’s debts.
This division also makes taxes on your company more complex, because the company will be taxed on its profits and the owner will be taxed on their individual income. As Forbes notes, if you form a corporation you must also establish a reasonable salary for yourself as the business owner.
If you wonder which entity type will best meet your business’s goals, speak to an attorney. They can guide you through your options for entity formation and help you choose the option that gives your business the strongest foundation for success.
