Different Entities Mean Different Equity -Which One Is Best for Your Business?
Choosing the best entity for your business is a matter of sifting through your needs and plans. There really isn’t one entity that’s best for all businesses (though some people will tell you there is), and you don’t have to be stuck forever with the choice you make now. For legal purposes, you have four main choices: sole proprietorships, partnerships, LLCs, and corporations. Both partnerships and corporations come in a few different varieties.
As you begin to consider the different entities, remember to take your personal situation into account. After all, it’s your time and your money that will go into supporting this business venture, at least initially. Some structures are much more demanding than others, and require a lot of maintenance (meaning paperwork). If you don’t have the time to dedicate to that extra business task, at least not without kissing every minute of your personal life goodbye, consider one of the less challenging entities. On the other hand, if you have a lot to lose, both personally and professionally, you may want to use the safest possible entity no matter how much time and money it costs.
Overall, your decision will be based on a variety of factors, including:
- Number of owners
- Optimal taxation
- Liability concerns
- Ongoing maintenance procedures
In some cases, the number of owners will limit your entity choices. Only single-owner companies can be sole proprietorships; only multiowner companies can be partnerships. Both LLCs and corporations (all varieties) allow for any number of owners.
Setup costs may be a factor in your decision-making. It costs nothing to launch a sole proprietorship. Partnerships range widely in price, depending on the complexity of the partnership arrangement, but a simple general partnership costs next to nothing to form and maintain. The biggest cost is your partnership agreement, which is legally optional but practically a must- have. LLCs come next in the price scale. They require state creation and registration fees and may require a lawyer’s assistance to be set up properly. Corporations are typically the most expensive entities to create and maintain. They also require by far the most comprehensive ongoing maintenance—and skipping any required procedures can strip your company of corporate status. If you don’t think you can keep up with all the paperwork, don’t form a corporation.
When it comes to liability and tax issues, every situation is unique. To help you with this part of your decision, talk your accountant or attorney. If the professional you use for personal matters isn’t experienced in business matters, get a second attorney to use for your company.