Which Business Entity is Right for Me?Posted on November 30th, 2018
- Now that you’ve decided to start your business, one of the first questions you’ll need to answer is what kind of business entity you’ll choose for your new company. A surface glance might indicate that one type fits your business, but many startups have discovered too late that their chosen business type held them back.Before you commit yourself to something that seems right in the moment, take the time to learn a little more about entity types, so you can kick off your business with full confidence and avoid a costly relaunch.
What to Look for in an Entity Type
When choosing an entity type, before you even look at the choices, you’ll need to answer some particular questions. Your business entity will drastically affect what you can do regarding stock, branching out, and your tax and legal liability. You’ll need a solid plan in place, so you know the most effective way to proceed as your business grows, then find the entity type that fits into your strategy.
Make sure you ask yourself the following questions:
- Is this business nonprofit, or for profit?
- Am I the sole owner, or do I have partners?
- If a partnership, are all partners active in the company, or only one?
- Do I plan to offer stock in the company?
- If yes, how many owners do I plan to have?
- Am I concerned about personal liability?
- Am I concerned about double taxation?
These questions may not cover everything, but will at least give you a baseline and help rule out some entity types that may not be for you.
Common Entity Types
In the United States, the most common type of entity is a C Corporation, but it is only one of several choices and not right for all businesses. Other common business types include:
- Sole Proprietorship: For companies with a single owner. The owner receives all profits but is also responsible for all debts.
- General Partnership: Multiple partners own and actively participate in the business. All benefits and liabilities are shared.
- Limited Partnership: Multiple partners own the business, but only the general partner manages it and faces full liability for it. Also called a “silent partnership.”
- Limited Liability Company: Allows owners, partners, and shareholders to enjoy partnership benefits while limiting their liability.
- C Corporation: Allows an unlimited number of shareholders and no personal liability, but faces double taxation if profits are distributed to shareholders through dividends.
- S Corporation: This corporation avoids federal taxes, but the shareholders are taxed on their share of the income. The company can only have a maximum of 100 shareholders, and only certain people or groups can invest.
Consult with a Professional
Deciding which entity can be complicated, so if you have questions about entity types, the best thing to do is contact a professional accounting advisor. Many professional accountants offer business formation services and can examine the details and goals for your business to determine which business type will protect your assets and give your business room to grow and expand.
Siegerman & Company offers business formation services to startups in South Florida. If you’d like more information, contact us for a complimentary consultation today.