One of the first and most important decisions an entrepreneur must make is what type of business structure to select for the company. Business entities such as corporations, limited partnerships, limited liability partnerships, and limited liability companies are creatures of state statutes. To different degrees, they each have legal rights and obligations separate and distinct from the owners and/or managers of the business. Business entities can buy property, make contracts, sue and be sued in their own name. Although most states offer similar options, the business entities available depend on the laws of the state in which the business is formed.
Entities can be distinguished by the way they address some of the following issues:
- Liability – If the business incurs debt or is sued, to what extent can the assets of the owners be reached by creditors?
- Tax Treatment – Will the entity incur pass-through taxation or double taxation? Pass-through means no tax is owed at the business level but rather is passed on to the individual on the individual owners’ share of income. Double taxation means that the business pays taxes on the income it earns, and individual owners pay taxes on the income they receive as dividends or employment income.
- Ownership/Management – Is there a limit to the number of owners there can be? Who has the authority to make decisions related to the business?
- Formation – How is the entity created, and what fees are associated with formation?
- Capitalization/Financing – What are the options for raising funds for the business?
- Exit Options – How do the owners transfer interest, dissolve or sell of the business?
The circumstances of each business and business owner should be considered to determine which business structure is most advantageous. If you are thinking of starting up a new business venture, you should consult with an attorney and/or a tax adviser to discuss the different options available to you.