With all the various business types you can select, how do you know which business type is best for you. LLCs. S-corporations. C-corporations, Sole Prop’s…there’s an alphabet soup of formation types to choose from.! No wonder so many entrepreneurs find the task daunting, confusing, and just make a decision. As an Entrepreneur, you already juggle countless tasks and competing priorities well before opening shop. However, this is no area to cut corners and skip steps as you may find it difficult to go back and change things.
The formation type you choose will have big impacts on various aspects of your business. According to the SBA, “The business structure you choose influences everything from day-to-day operations, to taxes and how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.”
Whether simply registering a DBA, setting up a corporation or forming a partnership, there are some key questions to ask yourself BEFORE you start:
- Will my business be for profit? Or do I focus on delivering a needed mission to the community?
- How much legal exposure does your business have? Can customers sue you? Do you want to/need to carry insurance?
- How many employees do you anticipate having? Do you plan on giving stock as compensation?
- As an owner, do you want to take draws or get paid on a payroll check like other W2 employees?
- Will the business need to acquire debt?
These questions are just a few that should be considered when deciding the proper business type. The way in which your business is formed will determine the personal liability of the founders, how taxes are paid, and other important details.
Once you’ve answered these questions, you’re ready to select the business structure that is best suited to your anticipated needs. The main legal structures to consider are:
- Sole Proprietorship
- Partnership
- Limited Liability Company (LLC)
- Corporation
- Nonprofit
Unfortunately, out of the list there is no one size fits all, or “best business type”. Each one comes with its own set of benefits and costs. Depending on the goods/services and number of owners, you may be REQUIRED to select a specific entity type.
