There are many reasons to form a business. You want to start a new business, or formalize the existing structure of an established one, or perhaps you are purchasing real estate and want to limit your liability. The key is to choose the correct entity type. Here are some factors to consider:

• Legal Liability: Does the business owner require protection from personal and legal liability related to the business’ actions?

General partnerships do not provide liability protections. Limited liability companies (LLCs) and corporations typically provide the owner(s) with limited liability, protecting the owner(s)’ personal assets from business liabilities, debts and contracts.

• Taxes: What are your business goals and the likely profits and debts?

General partnerships, LLCs, and S-Corporations allow for “pass through taxation,” meaning business income is only taxed once, as taxes on the owner(s)’ personal income. C-corporations (C-Corps) pay taxes on the company’s income and the shareholders pay taxes again on distributions from the corporation to its shareholders.

• Formation and Administration Costs: Do the costs of forming and maintaining a particular entity outweigh the tax benefits?

General partnerships have low set-up and administrative costs. LLCs and corporations must be registered with the state and are subject to annual reporting requirements and fees. LLCs require a moderate level of formality. Corporations must follow strict rules for bookkeeping and operations, which can raise costs.

• Flexibility of Ownership: How flexible does the business entity need to be for changes in ownership structure?

The amount of flexibility in the ownership structure of a general partnership or LLC depends upon the terms of the business’ ownership agreement. Corporations typically allow for easy transfer of ownership interests and more flexibility for raising capital through the sale of stock.

There are financial and legal risks involved in choosing the correct type of entity. Wescott Law has a team of attorneys who are experienced in business representation and can provide expert legal advice to assist with all aspects of business formation and employment law. Give us a call today.