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Strategies for business entity selection: a step-by step guide
Everybody enterprising to form a business should ask some basic questions about what their goals are in order to form the most effective business entity.
When taking the steps to forming a business, Pennsylvania entrepreneurs and investors have a variety of different forms that their businesses could take. There are limited-liability corporations, S and C corporations, partnerships, sole proprietorships, non-profit corporations and benefit corporations. Is there a single “best” structure for a business to take? There is not a simple answer to this question. In preparation for choosing the right business entity, there are a few preliminary evaluations that aspiring business owners can make to ensure they are working towards the most sensible and profitable setup.
What are the goals of the business?
The first question any smart aspiring business owner should ask is what is the business aiming to accomplish. A major part of this consideration is the idea of allocation of profits. The University of Pennsylvania School of Law provides a clear breakdown of this process as described in the following list:
· If a business is not looking to make a profit or get any investments, a non-profit may be the type of business to consider forming.
· One of the more diverse business entities that have varying options for how the company will be managed is a limited-liability corporation or LLC. LLCs still welcome investments from private financiers, and allows certain tax-breaks not possible for other entities.
· An S-corporation is an entity that still allows investors to privately finance the company, but the way things are managed and how taxes are paid are both more set in stone.
· Those who don’t want their investors to get pass-through tax treatment, and who are alright with having a straightforward management structure will probably be looking to form a C-corporation.
· Another option that is not always considered is forming a benefit corporation. This type of business entity is different from non-profits. It is reserved for those who do have a social mission, but who also aim to make a profit in conducting their business.
There are a lot of factors that come into the formation of each business entity, including how retirement plans will work, the method for accounting, and whether there will be a self-employment tax. For instance, companies with a sole proprietor, even non-profits, are still subject to self-employment taxes, while C-corporations, S-corporations, and LLCs are not.
How an attorney can help strategize
While it is possible to lay out the different business entities and choose which one seems to fit best based on a comparison, it remains true that there are many different implications for each type of business entity. Once someone in Pennsylvania has chosen which business entity their corporations will be, it becomes more difficult to go back and revise the initial decision. It may be a good idea to seek the counsel of an attorney who practices business and commercial law in the local area to make sure all factors have been considered before making any final decisions.