Choosing a Business Entity
Choosing a business entity is a legal way of protecting your business in terms of assets and liabilities, and will help you to determine your tax obligation based on the business structure you have chosen.
Yet, this task is truly difficult to settle on as wrong decision can result to heavy burden, just follow these tips in choosing a business entity.
The Importance of Choosing a Business Entity
When you plan to start a business, choosing the right business entity is the top priority since this area tackles the complexity of the procedure in filing for the income tax statements and other non-tax issues. Generally speaking, there are four common types of business entities that are widely used in the business world namely; sole proprietorship (also known as DBA or Doing Business As), partnership (general or limited), corporation (C-corporation or S-Corporation), and Limited Liability Company or LLC.
Among the four, the DBA is the most popular type and the most easiest to form as a legal business entity. Being the sole owner, he or she has the total control in managing the business. Maintaining this type of business structure is very easy and there’s no hassle in terms of setting up the business. However, the great disadvantage about DBA is the fact that the owner is deeply accountable to the debts of the business and has no liability protection in any case. In addition, valuable assets of the owner are at stake if the business faces a lawsuit.
Partnership is clearly defined as if there are two or more individuals sharing in the ownership of the business and this comes in the form or general partnership and limited partnership. The pros of this business entity are it is not complicated to set up and no documentation requirements needed; but the big disadvantage about this legal entity is the fact that there is no actual assurance for liability protection.
In the case of corporation, it is a separate entity that provides protection to the owner or founder of the company against company debts and other personal liabilities. It is not generally easy to set up because it entails a lot of paperwork. And for the LLC, it enjoys a passed-through taxation and liability protection as compared to corporation. Setting up the legal business entity for the LLC is not easy like a corporation.
Significant Tips for Choosing a Business Entity
Because of the complexity in choosing a business entity, there are certain aspects to take into account.
- Protection of Liability – This aspect is very important if you want to protect your valuable assets and liabilities, and based on the description of the types of legal business entities, the DBA and Partnership are the ones that have no guarantee for this area.
- Tax Obligations – You should choose an entity that allows you to save more in terms of paying the taxes. It shows that S-Corporation is the best choice for this reason.
- Management Foundation and Cost – Creating a strong foundation for the administrative structure of the business is crucial and can be costly depending on the type of the business entity, particularly in a Corporation and LLC.
- Transition of Ownership – In cases that there’s a need to transfer ownership and the company has several shareholders, this must be done through legal actions handled by the experts.
- Funding for Future Needs – A growing business may seek additional funding to support its growth, if you choose the right entity it will easy to get the capital needed for this purpose.