Selecting the best business form for a new business is one of the most important start-up steps. Oftentimes, this step can be overlooked and its importance undervalued but it should not be because the business form selected will impact taxation, management and liability concerns.
There are advantages and disadvantages, benefits and potential drawbacks, to each business form and the best business form for the business depends largely on the goals of the business owner. It is also possible to begin with one business form and change to another as the business grows. This can be true, as many businesses may start out as sole proprietorship’s and grow into another business form. Sole proprietorship’s are the simplest business form but provide limited protection from personal liability for the business owner.
Another consideration when selecting a business form is how the business may choose to raise capital and want to raise capital down the road. The type of business form selected also impacts the costs associated with running the business and what types of paperwork, and how much, will have to be filed. It can also impact control of the business.
The four main categories of business form include sole proprietorship, partnership, limited liability companies and corporations. Corporations can be costly to run, have many requirements associated with them and are sometimes referred to as double taxed but they limit liability for owners. Limited liability companies provide protections against liability and what is oftentimes viewed as favorable taxation. Partnerships also avoid what is sometimes referred to as double taxation but do not provide the same protections against liability and are usually governed by a partnership agreement.
Business formation and planning is a critical consideration for a business starting up and should take into account the needs of the business now and its goals for the future. It is important for entrepreneurs and business owners to understand the different types of business forms and the impact of each when selecting the best option for them and their business.