Selecting the best business form for a business venture is an important decision for any entrepreneur facing it. The selection of a business form has many important implications for the business, as well as the future of the business as it grows and enjoys success. The type of business form selected has important tax and liability implications in addition to how the business will be managed and the routine reporting requirements the business must satisfy.
There are four primary types of business forms including sole proprietorships, general partnerships, limited liability companies (LLC) and corporation. Sole proprietorships are popular for their ease of use, however, they can expose the sole proprietor to greater personal liability than they may feel comfortable with. The need for a sole proprietorship to graduate into a partnership or LLC, for instance, as the business grows may arise. Partnerships are formed when two or more individuals are engaged in a business. Though partners in a partnership are personally liable and may be liable for the other partners, a limited partnership or limited liability partnership can offer the partners some personal protection from liability. Though partnerships should always have a written partnership agreement, they require few formalities and can have tax advantages.
A limited liability company (LLC) offers the personal protection of a corporation with the favorable pass-through tax treatment of a partnership and the ease of administration also known from the partnership structure. It provides liability protection to its owners from company debts and other liabilities. The corporation is the last major business form to consider. Though corporations offer liability protections, they also carry more formalities than a LLC that are sometimes described as burdensome. Corporations can have some tax advantages but depending on the structure, may be liable for double taxation. Additionally, however, corporations are preferable over LLCs if the entrepreneur expects to take the company public at some point.
Business formation is an important step in the process of starting any business and should not be overlooked or treated lightly. There are many considerations to be familiar with, understand and take into account which is why anyone starting out a business should be as informed about their options as possible.
Source: Entrepreneur.com, "The Basics of Business Structure," Michael Spadaccini, March 29, 2009