Selecting a legal entity for your business is not a decision that should be made lightly. It is much easier to get yourself into a business entity than it is to get yourself out of one. If after you have created a business entity you subsequently decide to change the form of the entity for your business then it will likely require the closing down of your first entity and the creation of a second entity. Once a business entity has been capitalized then the subsequent closing down of the entity will likely require the completion of legal documents and the closing down of the accounting books and records of the business. Frequently, this requires the assistance of both an attorney and an accountant to complete this process. For this reason it is important to give careful consideration to selecting a business entity from which to operate your business.
Before selecting a business form you should ask yourself the following questions:
- Do you have specific tax considerations?
- Are you looking to limit your liability from the business?
- Are you looking to an informal management structure for your business?
- How do you envision the management and control of your business?
- Do you have the time and/ or money to adhere to complex legal formalities?
- How long and how well do you know the people with whom you are about to enter business?
- Do you have a particular aversion or tolerance to risk?
- Would you like owners’ interest in the business to be transferable?
- Do you have any concerns about any particular creditors?
- Are you trying to isolate business risk?
The questions above are not intended to be a comprehensive list of questions relevant to business formation. Instead, they are intended to get you thinking about how you envision your business will run. Based upon a client’s responses to these and other questions we are better able to counsel a client with regard to the selection of a business entity.
- The business entities most frequently discussed include:
- Sole Proprietorships
- General Partnerships
- Limited Partnerships
- Limited Liability Companies (LLC)