Should I Form a Business?

Business Formation:

Times, tax laws, and legal precedents have changed, and people going into business for themselves in the 21st century have also had to change how they go about creating a business entity.

Simply hanging the sign outside your door today will probably result in exposure to taxes and legal liability that shouldn’t apply to you. To select the business entity that best suits your need, new entrepreneurs should first consider what is most important to them.


What are the Business Entity Types?

A sole proprietorship is a business entity that is virtually indistinguishable from its owner. General partnerships are formed by two or more legal entities (any kind of legal entity can be partner), and each of those entities are individually responsible for the partnership. A limited partnership is much like a general partnership in structure. The main difference is that in a limited partnership, there are two different kinds of partners: general and limited. A “C” corporation is a standard state-formed corporation.


S Corp , C Corp or LLC

An “S” corporation is much like a “C” corporation in that it is also its own legal entity, protects its shareholders from legal liability, and requires a significant amount of effort and money to start and maintain. A limited liability company (LLC) is essentially a hybrid of a corporation and a partnership. An LLC provides the same kind of tax and liability benefits as a corporation, but has the same management structure as a partnership.


What type of Business Should I Form?

One of the first decisions you will have to make as a business owner is how the company should be structured. This decision will have long-term implications, so consult with an accountant and attorney to help you select the form of ownership that is right for you. In making a choice, you will want to take into account the following:


• Your vision regarding the size and nature of your business.
• The level of control you wish to have.
• The level of “structure” you are willing to deal with.
• The business’s vulnerability to lawsuits.
• Tax implications of the different ownership structures.
• Expected profit (or loss) of the business.
• Whether or not you need to re-invest earnings into the business.
• Your need for access to cash out of the business for yourself.

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