Business formation is an important part of the process of starting a business. New business owners can set up their business for success or difficulty based on the choices they make during the legal business formation process.
How to decide on the best business form
There are three primary considerations to take into account when selecting a business form.
- Legal liability: The business form selection that is made will impact the personal liability of the business owners, partners or members. Because personal liability is such a significant consideration, it should receive special attention during the business formation process. Sole proprietorships do not provide any personal liability protection, while a limited liability company (LLC) or corporation provide personal liability protection for its members or owners.
- Taxation: How the business will be taxed is an important consideration to take into account when forming a business. Because they type of business form selected impacts how the business will be taxed, new business owners should be familiar with the taxation consequences of their decision. A sole proprietor is taxed on their personal income tax form, while both the corporation and the owners are taxed separately in the corporate structure which is sometimes referred to as double taxation. An LLC can make an election of how it will be taxed.
- Record keeping: The business structure affects the amount of record keeping that must be done. Corporations require more record keeping and generally may be more costly to run than a sole proprietorship or partnership. Likewise, a corporate business structure generally offers less flexibility than other business forms.
Business formation impacts how the business is set up but can also impact how the business grows and develops over time. To set up a successful venture from the start, it is helpful to know what business law tools can help including how to decide on the best business form.