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It’s vital to choose the right business entity from the start

| Jul 20, 2020 | Business Law |

You finally decided to take the first step toward being your own boss by starting your own company. Forming a new business requires much more than opening up shop. You will need to make a variety of business and legal decisions beforehand.

One of the first, and perhaps most vital, decisions you will need to make is under what type of entity you will structure your company. First, it may help to know what the primary entity types are.

What types of entities do you have to choose from?

Most Pennsylvania business owners would agree there are five main types of business entities to choose from, but there could be subcategories under the umbrella of a certain entity type. Below are the options you will need to consider:

  • Corporations are ordinarily large businesses that have one or more owners, and taxing authorities treat them as separate entities for tax purposes. Management, a board of directors and shareholders operate and supervise them.
  • S Corporations share similarities with corporations, except shareholders pay taxes on income, losses, credits and deductions of the business.
  • Limited liability companies allow members to choose whether to pay taxes as corporations or whether taxes pass through to the members.
  • Partnerships involve two or more owners who share ownership and control of the business. Each owner pays taxes on his or her share of the profits and equally share in the payment responsibility for the company’s debts, losses and costs.
  • One person operates and controls a sole proprietorship but also takes on all liability and responsibility for its debts, taxes and other costs.

As you go down the list, the amount of personal liability you take on increases with a corporation providing you the most protection.

Why is this so important?

When you choose a legal entity structure, the consequences of doing so could affect the course of your company’s future through the following:

  • Each major type of entity pays taxes differently.
  • How you pay taxes depends on the type of entity you choose.
  • Your personal liability for the actions, debts and legal issues varies, depending on the type of entity.
  • The amount of control you have over the operations of the company, considering whether you share responsibility with other owners or investors.
  • Whether you will have employees could affect the entity structure, or you and the other owners will run the company.
  • The entity type should support how much you want your company to grow.
  • The type of entity could dictate how you will raise money for your business. For instance, will you issue now or in the future?

These and other questions require careful consideration before choosing an entity type. It will require gaining an understanding of how each entity would fulfill these requirements in order for you to make an informed and well-thought-out decision. Your chances of making a choice that will support your vision of your company and its future would likely increase by consulting with an attorney experienced in business formation.