When you set up your business, you have to decide what entity you want your business to be. Some business entities develop simply through conducting business. Others require formalization to achieve them. Making the right decision, however, requires that you understand the basics of the various business entities. The best one for you will depend on how much control you want and how much capital you have to protect. Remember that the individual requirements for each entity will vary based on your state’s laws.
The sole proprietorship is the basic business form for most businesses. It is actually the default when you’re the only one running the business. You do not have to go through any particular formalities to form one. The downside is that you don’t have the benefits afforded through incorporation. However, a sole proprietorship gives you complete control of your business.
The partnership is the default business entity when more than one person is involved in the business. An informal partnership agreement forms as soon as you and another person start doing business activities together. The risks and benefits are shared equally in a default partnership. However, you can and should ideally formalize a partnership agreement if this is the business form you want. This way you can spell out all of the requirements of the partnership and any limitations. This will provide more protection than a general partnership. Otherwise, you will be responsible for everything that your partner does with only a few exceptions.
Limited Liability Corporation
The limited liability corporation is fairly new, and it is very popular in many states. It has the pass through taxation structure that the partnership and sole proprietorship forms of business enjoy. However, it also provides significant protection for you if you are sued. The primary challenge though is that it has the more extensive formalities to comply with state law, and it can be difficult in many states to transition into a C corporation if you want to start offering public trading options.
The C corporation offers the most protection for larger businesses as well as the opportunity to gain investors. However, with that increased capital and the ability to raise more comes a partial loss of control unless you choose a close corporation rather than a general C corporation. C corporations and close corporations both require formalization in accordance with the state laws. You can download those free forms from legal services such as Rocket Lawyer.
C corporations do offer significant protection for the assets and your individual liability. However, they are also the most expensive option available. You are taxed doubly if you are a C corporation. This is true of close corporations as well unless your close corporation is also classified as an S corporation.
Make Your Choice
After you have gone over the different types, you need to determine which form is going to meet your needs best. Sole proprietorships and partnerships can be easily transformed. Corporations and LLCs require greater formalization and additional fees but you can incorporate online through various online legal services like Rocket Lawyer. When just starting out, a sole proprietorship and partnership may be the best choice until you have determined what all you want to accomplish with your business.