How to Choose the Best Type of Business Entity

May 17th, 2013 by

Starting a business is a lot of work. You need to develop and write a business plan, determine your financing, select a location, and plenty of other time-consuming tasks. To be sure, you will need to spend the bulk of your time on certain tasks and less time on others. However, one detail that absolutely requires your best thinking and careful consideration is determining the best type of entity for your business. The type of business entity that you choose will affect the rest of your business affairs, including the way you file paperwork, deal with personal liability, pay taxes, and even file for bankruptcy protection. Although you can always change your form of ownership later, it’s best to get your strategy clear upfront to avoid any unnecessary headaches down the line.

What are the different types of entities?

Sole proprietorships – In a sole proprietorship, you are the sole owner and manager of the proprietorship, which means you are responsible for all debts that the business incurs.

Corporations – Corporations are independent entities owned by shareholders. A corporation is liable for its debts and actions and is able to generate capital through the sale of stock.

S corporations – An S corporation is special type of corporation created through an IRS tax election that passes corporate income, losses, deductions and credit through to its shareholders.

Partnerships – A partnership is an independent entity that is owned by two or more people. Each partnership owner shares responsibilities, profits and losses.

Limited liability corporations – An LLC combines aspects of a partnership and a corporation. LLC owners are called members. An LLC takes the liability off the personal owners.

Cooperatives – A cooperative is a limited liability entity that is owned by a group of people. A cooperative can be either for-profit or not-for-profit.

Which type of business entity is right for you?

Choosing the best type of entity can be complex, since the decision depends on a variety of different factors and there are trade-offs for each option. For example, sole proprietorships tend to be attractive to new entrepreneurs because they’re easy to start, easy to dissolve, and they give you complete control of operating decisions. However, they also mean that there is unlimited liability for you, and they tend to be less attractive to prospective employees.

Or maybe you’ve been discussing business with another person and would like to start a partnership. Advantages for this type of entity include a shared financial commitment to the company as well as the benefits of two complementary skill sets. However, partnerships also mean both joint and individual liability, and the potential for disagreements among partners.

Ultimately, it comes down to a judgment call. That’s why it pays to seek professional advice. At Clark & Chamberlin, we provide consulting services for a wide variety of business-related issues, including the selection of your entity type. Please contact us so we can help you determine the best type of business entity for you.