The business formation process is undoubtedly exciting, but it can also involve making some important decisions, one of which involves choosing the right business entity. The one you decide on can have long-lasting legal, operational, and tax implications for the company as well as its owners.
With that in mind, and in order to make the right choice for your startup, you’ll want to consider the different options available to you to determine which best fits your goals.
Business Entities: What They Are
Your business entity is the legal organization that conducts business. It can be simple in nature, making your business and you the same entity, or it can be complex, taking the form of a corporation.
A sole proprietorship is the simplest type of entity; one person is the owner and operator of the business. When you start your business, it automatically becomes a sole proprietorship for legal purposes.
A partnership is another type of entity. In one, the business has more than one owner. Partnership taxation is simple, with business profits being divided proportionally.
There’s also the option of forming a C-corporation (or simply, a corporation). Doing so is the most complex option, but it offers the greatest level of separation between the business and the owner.
Perhaps one of the best well-known options, though, is a limited liability company (LLC), which combines some of the benefits of a sole proprietorship with the liability protection that corporations enjoy; you can even form a single-member LLC.
Beyond an LLC, another option is an S-corporation, an entity that joins some of the benefits of an LLC with those of a corporation. You won’t have legal or financial liability for business activities, but you will have flexibility when it comes to paying dividends and salaries to owners.
Choosing the Right Entity
Because every business is unique, there’s no one-size-fits-all approach to choosing an entity. As such, in making the decision that suits your needs best, you’ll want to consider a few criteria, including the following:
Number of Owners
You’ll want to keep the number of owners the company has in mind, as well as how many of those are active owners; doing so can help you start narrowing choices down during the business formation process.
If you’re the only person in the business, for example, you can set aside a partnership entity. In addition, there’s also no reason to form a single-owner C-corporation most of the time.
Keep Liability Protection in Mind
Think carefully about the kind of liability protection you’d need for your business. If you’re a freelance artist, for instance, your legal exposure tends to be low, which means a sole proprietorship could work well. If, however, you run a store and someone slips and falls, you can face a significant legal liability, meaning one of the corporate entities would suit you best.
Put that same logic to work when you consider the financial obligations your business will have: If your business could face the chance of owing a lot of money, you’ll need to be properly protected, making a corporate entity the best choice.
Think About Tax Implications
Being able to avoid corporate taxes is the right choice for many people, but you can’t forget about payroll taxes. If you run an LLC, all of its profit is treated as income for the owner. With an S-corporation, however, you can designate some money as your salary, which is subject to payroll tax, and the rest as dividends, which aren’t.
Making the Right Choice for Your Startup
When it comes to selecting a business entity, one of the best things you can do for your startup is to turn to a business formation lawyer who can guide you through every step of the process. Reach out to us at Sul Lee Law Firm in Dallas, TX, to speak with a business attorney today.