When you start a new business, or sometimes, when your existing business grows, or your personal assets change significantly, it's time to evaluate or re-evaluate the type of business entity your company runs under. Many small businesses begin as sole proprietorships because of the ease of setting up and running this type of business entity. The best type of business entity for your specific situation strikes an optimal balance between ease and expense involved in fulfilling legal requirements for setup and operation; tax matters; and protection against liability. It can be a complicated part of corporate law, and consulting a business lawyer is a smart way to learn which type of business entity makes the most sense for your specific circumstances.

Formation & Ongoing Requirements

A sole proprietorship doesn't have legal requirements for formation, aside from local business license applications and filing to pay state and federal taxes, and regulation for ongoing operation is minimal. While they're easy and inexpensive to form, sole proprietorships can expose the owner to unnecessary risk. A Limited Liability Company (LLC) requires more formal documentation and fees to establish and run, but also offers more protection for the owner's personal assets than a sole proprietorship. Corporations offer asset protection and certain tax advantages, but they're more costly and complicated to set up, and they require some ongoing recordkeeping for things like maintaining a board, documenting corporate actions, or possibly conducting shareholder meetings.

Tax Matters

Taxation is another key consideration when choosing a business entity. Each type of business structure has different tax implications, such as whether taxes are paid on your personal tax return or through the business entity; which expenses may be deductible for your business; and the rate at which you pay taxes. There are many factors that can affect your taxation, so consulting with a tax professional on how each type of business entity would work in your case is an important step in your research.

Protect Your Personal Assets Against Liability

Another important factor in choosing a business entity is asset protection. Each type of business entity offers a different level of protection for the owner's personal assets in the case of liability claims or judgments against the business. A Sole Proprietorship can expose your personal assets to business liabilities, including acts of your employees. A Corporation or LLC, if operated properly, can protect your personal assets from business liabilities. You may also consider the level of overall risk involved with your business in making your entity selection. A construction company is more prone to lawsuits than, say, a small accounting firm. While owners of both would likely carry insurance to protect against liability claims, the right entity structure can also shield their personal assets if a claim exceeds their liability insurance limits.

Business Law And Entities Are Complicated. Don't Try To Go It Alone!

Although you'll find a great deal of generic advice about choosing a business entity online, the advice of an experienced business lawyer can help you avoid unforeseen legal disputes and prevent costly mistakes. There is no one-size-fits-all answer about choosing a business entity, because the “right” choice is a balance among several factors and how they apply to your specific business situation. Call or contact us online for a consultation, and we'll help you determine what type of business entity is best for you and your company!