There are several different types of business forms new business owners can choose from when setting up their business. The importance of selecting the best business form for the new venture should not be overlooked and new owners should understand the different types and how to make the best decision for them and their business.
A sole proprietorship is considered the simplest business form which gives the business owner the greatest control over their business. It does not provide personal liability protection and the sole proprietorship is taxed on the sole proprietor’s personal tax return.
A partnership is similar in terms of personal liability protection and taxation to a sole proprietorship, however, it is taxed on the personal tax returns of the partners. Additionally, it is typically governed by a partnership agreement set up by the partners.
A corporation is a more complex business form and gives business owners less control over the business. It can also be more costly and complex to run, as corporations are typically subject to a greater number of requirements and regulations. It is also sometimes considered double taxed because the corporations pays taxes, while the owners or shareholders also pay taxes. Corporations, however, provide complete personal liability protection to owners or shareholders.
Limited Liability Company (LLC)
Limited liability companies are typically governed by a member agreement and provide personal liability protection for the members. In addition, the members can commonly choose if they prefer to be taxed as a corporation or partnership.
Selecting a business form has major implications for the start-up phase of the business and down the road. It is worthwhile to carefully make that decision and be familiar with all the different options available and how business law can help.