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How do I choose the best type of business entity for me?

Like other Waco entrepreneurs, you made the decision to start your own business. You might discover that making that choice, however grueling, was the easy part. Before you open your door for business, several other decisions require your attention. One of those decisions entails choosing what form your business takes. Failing to understand the importance of this choice could cause you problems in the future and jeopardize the success of your business. The discussion below should help you determine what type of business entity meets your needs.

What are my options?

Five basic types of business entities exist:

  • Sole proprietorship
  • Limited Liability Company
  • Partnership (general and limited)
  • Small business corporation
  • Corporation

Understanding the pros and cons of each should help you make the right decision.

Sole Proprietorship

Little separation between you and your business exists in a sole proprietorship. You take on all of the liabilities and benefits of the business. You take on the same risks as the business does (i.e. debts and lawsuits of the business). However, accounting records must remain separate from your personal expenses. The option comes with the following risks and rewards:

  • Simplicity
  • Inexpensive
  • Fewer record keeping requirements
  • No hassles when ending the business
  • Sole decision-making
  • Sole liability for debts and losses
  • No sharing of profits
  • Difficulty raising money
  • Personal liability

A sole proprietorship only survives while you run the business. When you pass away, your business dies with you.

Limited Liability Company

This business entity combines aspects of a partnership and a corporation. Operations remain flexible, and you enjoy limited personal liability for debts and legal actions. Single-member LLCs allow you to serve as the only member. The Operating Agreement remains between you and the LLC. An LLC allows you the benefits of a sole proprietorship without all of the liability.

General or Limited Partnerships

If you and one or more other persons start a business, this entity might work for everyone. Each of you provides skills, labor and capital, along with property needed to start and maintain the business. Each of you shares in the profits and losses of the business. Unlike a general partnership in which every partner remains liable for debts, a limited partnership limits that liability to the percentage of each party's investment. This option provides more sources for capital but also comes with more input into the operation of the business.

Corporation or Small Business Corporation

A corporation's activities and operations come with limitations based on its charter. The business bears liability and responsibility to shareholders. A regular corporation pays taxes twice. First, the corporation pays taxes on profits. Second, it pays taxes on distributions to shareholders. A small business could elect to form a small business corporation (S-Corporation) that eliminates this double taxation by allowing owners to report profits on their personal income tax returns. Corporations come with the following risks and rewards:

  • Limited personal liability
  • Perpetual existence of the company
  • Transfer of business shares
  • Easier expansion
  • Operation restricted to state of formation
  • Higher organizational costs
  • More legal requirements

A corporation may also be able to raise money easily by legally selling stock.

The best choice for the good of your business

Regardless of your choice, meeting the legal requirements of each entity remains essential. Furthermore, setting up your entity often involves more than just filing a piece of paper. Failure to adhere to government regulations and legalities could jeopardize your right to conduct your business and result in fines or other penalties. For instance, if you fail to set up your entity properly or maintain it in accordance with current law, any protections you enjoy might vanish and open you up to personal liability. Consulting with an attorney prior to making your choice could help prevent legal issues in the future.

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