Selecting a business form is an important decision and its importance may sometimes be overlooked. Putting together a new business requires many different decisions and the decision of what business form to select should be carefully considered.
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There are several factors take into account when deciding on the best business form including:
- Business taxes: The business structure selected impacts how the business pays taxes and what taxes it must pay. It can also impact the personal liability of the owners or members. A sole proprietorship is taxed at the personal level on the sole proprietor’s personal tax return which makes the sole proprietor personally liable for the losses and liabilities of the company. A limited liability company (LLC) may be taxed this way or may be taxed as a corporation so it is important to understand which method of taxation will apply.
- Personal liability: Limited liability companies (LLCs) limit personal liability like corporations and as opposed to sole proprietorships. LLCs, corporations and limited liability partnerships have different levels of personal liability protections, while sole proprietorships offer none. It is important to understand the liability protection provided by the business form selected.
- Industry: Based on the type of industry the business is in, choosing a business form may be a way to address some of the risk that exists in that industry for the business. Common practices and state regulations impacting risk and liability exposure can vary by industry and may impact the selection of a particular business entity. In other industries, having flexibility and fewer requirements may be more desirable which may also impact the selection of a business form.
Selecting a business form has crucial legal, financial and operation implications to consider. For that reason, familiarity with business Law can help at this stage of the process of starting a business.