When you are starting a new business, you may be paying attention to your products and services, your business partners and employees, your potential customers and many other factors. All of those things are more than enough to keep you busy. However, it’s also important to take the time to make sure your business starts off with the most appropriate legal form. This can save you a lot of trouble later on, and can put your business on the right footing for future success.
What business forms can a startup choose?
There are four main business forms to consider and choose from when starting up a business. There are pluses and minuses to each. The business form selected can impact how easy it will be to run the business or how expensive it is to operate. It can also determine if the owners will have limited liability protection from creditor claims and lawsuits stemming from the operations of the business.
Sole proprietorships are the simplest type of business to set up and operate. A sole proprietorship has one owner and the business is taxed on the owner’s personal income tax return. However, the owner may have personal liability for claims made against the business.
A partnership is another business form a business with two or more owners may consider. It is typically governed by a partnership agreement and the business is taxed on the personal income tax returns of the partners. The partners do not enjoy protection from personal liability.
A corporation is the most complex and expensive business form that can be selected. Once the Articles of Incorporation are filed, the owners will have limited liability protection. A corporation may be referred to as double taxed because the owners are taxed and the corporation is also taxed.
A limited liability company is formed by company’s owners (called members once they have filed articles of organization). The members enjoy limited liability protection. The members of an LLC can decide if they want to be taxed as a partnership or as a corporation.
It may be possible to start out with one business form and change to another as the business grows. An attorney with experience in business law can help business owners make important early start up decisions, including business formation decisions, and manage the growth of their business down the road as it enjoys success.