Selecting an entity is an important step in business formation

If you are starting your own business, you must choose your business entity carefully. This decision is made early in the business formation process, but can have long-term consequences for the business, as well as you personally.

There are several different business entities available to choose from. Because each entity comes with its own tax obligations and debt liabilities, it is important to fully understand your options before making a decision.

Sole proprietorship

A sole proprietorship is the most common form of business and is easy to set up. It allows one person complete control of the business, but that person is personally liable for the business’s financial obligations.

Partnership

A partnership is similar to a sole proprietorship, except it involves at least two people owning the business. The business’s profits and losses are reported on the partner’s individual income tax returns, and owners agree to share in profits as well as the liability for the business’s financial obligations.

Corporation

A corporation allows the business to become its own entity, separate from the owners. This allows the corporation to be held liable for its own financial obligations and the owners to be protected from personal liability. However, a corporation can be expensive to form and requires extensive record-keeping.

LLC and LLP

Limited liability companies (LLCs) and limited liability partnerships (LLPs) allow the business to be a separate entity from the owners and protects them from personal liability. Like a partnership, the profits and losses can pass through to owners’ personal income without the business being taxed.

Choosing a business entity for your business to operate under is an important decision that should not be made on a whim. However, having a full understanding of all your options will help you make the right decision for your business.

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