Choosing a Business Entity

If you are starting a business, you must give some thought to the form the business will take. There are a wide variety of choices and some make more sense than others in particular situations. Make the wrong decision and you can really regret it.

In legal terms, the issue facing you is known as the decision to incorporate. This is a bit of an incorrect use of the word incorporate. While the corporate entity is common, there are plenty of others as well.

Picking a business entity is difficult for most people. The problem is each option offers pros and cons. Who is to know which one should be selected? Well, let's take a closer look at the choices you have.

What is the single most common business form in the world? It is the sole proprietor. This occurs when one person just starts doing business. It is highly flexible, but not great overall. You are personally exposed to liability and the tax situation is not great.

What if you have two owners of an unincorporated business? The default designation is a general partnership. The tax situation is a bit better, but liability is a big problem. You are personally responsible for debts and lawsuits of the partnership.

For many businesses, flexibility and taxes are two big issues. They are also positive aspects of a partnership. There are no corporate formalities and taxes flow through to the partners so the entity does not have to pay taxes.

The limited liability company is promoted as the greatest thing since sliced bread for small businesses. The benefits come in the form of flexibility, favorable tax designation as a partnership and protection from personal liability for business debts.

When something is touted by politicians as an answer, one should be wary. The same holds true for the LLC. Yes, it offers flexibility and asset protection, but it also comes with outrageous taxes and fees that make it a less attractive choice.

The corporate entity is the beast of business entities. Created hundreds of years ago, it is the basic business entity of stock markets and multinational businesses. It is best known for providing protection to owners from business debts.

There are definitely cons to choosing a corporation for your business. It is a formal business and archaic rules must be followed. This often means retaining a business attorney to make sure you are incompliance, a costly requirement.

The opportunities can be a bit overwhelming. If you want flexibility, the LLC would seem to be the best. Want absolute protection from lawsuits? The corporation would seem the answer. The best way to choose is to talk with a CPA and attorney.

Article Source: http://www.dummiesguideto.com

If you need to incorporate in California, contact Richard A. Chapo at SanDiegoBusinessLawFirm.com.

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