10 Essential Questions To Ask Before Selecting A Business Entity
If you are starting a new company or have an unincorporated entity that has grown to the point where protection of your personal assets may be desired, the selection of the proper business entity can be critical to the future success of your business. There are 10 essential questions you need to ask as part of the decision-making process before making your selection.
For those who own and operate businesses, the “choice of entity” selection is one of the most important you will make for your company. There are several from which to choose, and each one has different legal and tax consequences. These include:
● Sole Proprietorship
● General Partnership
● Limited Partnership
● Subchapter S Corporation
● C Corporation
● Limited Liability Company
Many states also allow for certain types of professional corporations but the entities listed above can be formed in jurisdictions throughout the U.S.
The 10 questions that need to be asked in determining which of these entities best serves your company’s expected needs include:
1. Are you planning to run your company on your own or with others?
2. Are the others going to be equal partners?
3. Are the others intending to help operate the business or just invest in it?
4. Do you want to shield the assets of the putative investors, including
yourself, from potential personal liability?
5. Do you want to avoid the phenomenon of double taxation where the company first gets taxed on certain income and then the shareholders get taxed again?
6. Do you want the business to be a short-term endeavor, lifetime enterprise or a company that lasts beyond your life?
7. Do you want to open the business with less formality or prefer to take measures to create a separate and distinct legal entity?
8. Do you want to start an enterprise where you are always one of the chief
operators of the company or do you want to have flexibility in the future,
if the business reaches a certain point, to let others operate and you
move to an advisory role, or serve as a director, while retaining your
9. Do you want the company to have a board of directors comprised of outsiders, original investors or a mix of both?
10. Do you want to be in control of the company and maintain a majority equity stake?
It is vital to consult with legal counsel as well as your financial advisor when reviewing each of these questions in order to arrive at the best decision about which business entity will work for your circumstances and help ensure your company’s success.
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