6 Considerations For Business Entity Selection
One of the most impactful decisions business owners will make is their selection of business entity – sole proprietorship, partnership, limited liability company (LLC) or corporation – for their company. This decision has important tax, legal and operational implications, so choosing the right entity is vital.
Business owners have several choices when it comes to choosing the right type of business entity for their enterprise. Here are six considerations that must be made before you choose:
1. Tax Treatment – whether the company and its shareholders may be subject to double taxation; C Corporations are subject to double taxation but S corporations and limited liability companies (LLCs) are not.
2. Ability to Raise Capital – C Corporations provide the greatest flexibility, and S corporations have some flexibility, but shareholders must be limited to 100. Partnerships may be cumbersome in this regard.
3. Separation of Ownership and Management - Owners are considered separate from management in businesses that incorporate as corporations, LLCs or limited partnerships. Owners are not separate from management for sole proprietorships and general partnerships and can be held personally responsible for any adverse consequences that may arise from management decisions.
4. Limited Liability Protection - The primary reason for selecting to incorporate a business as a C corporation, S corporation or LLC is to protect the owners’ personal assets from potential business liabilities. Sole proprietorships and general partnerships do not offer this asset protection, so the owners of these types of businesses can be held personally liable for any business debts or legal judgments against the company.
5. Ability to Transfer Ownership - With C corporations and S corporations, you can add new shareholders and transfer shares with relative ease. Partnerships would have to be terminated and sole proprietorships sold in total to transfer ownership.
6. Ease of Incorporation – Sole proprietorships have the fewest formalities – you only need to register the business with certain agencies in the state, county and city. All other entities require registration with the Secretary of State in their state as well as other formal recordkeeping rules to retain limited liability protection.