The type of business structure a new business owner or entrepreneur selects can impact all aspects of their business. For that reason, new business owners and entrepreneurs should know how to evaluate different business forms to make the best selection out of all their options.
There are three primary considerations to evaluate when deciding on a business structure during the business formation process including:
- Ownership – a sole proprietorship has one owner, while partnerships have two or more people. Corporations and limited liability companies also have one or more owners or members.
- Liability – sole proprietorships carry unlimited personal liability as do partnerships unless they are organized as a limited partnership. Owners and members are protected from personal liability in limited liability companies and corporations.
- Taxes – sole proprietorships are taxed on their personal income tax and partnerships are generally taxed that way as well. Most corporations are taxed as a corporation which is sometimes considered double taxation because its owners will also be taxed. Limited liability companies can decide to be taxed on the personal income tax returns of members or as a corporation.
Other important considerations to take into account when deciding on a business form include how costly the business form selected is to run; how many requirements and regulations are placed upon the business form; how much control the owners or members will have over the business; and the limits the business form may place on the company’s ability to raise capital when needed. Business law can give business owners the tools they need to make an informed decision about which business form is best for them.