Starting a new business can be exciting. However, it’s important not to get so caught up in the excitement of launching a new venture that you neglect the basics. One of the most important decisions involving a new business is choosing a type of business entity.
Considerations when Starting a New Business
Along with the products or services provided by the actual company, there are several considerations when starting a new business. One of the most important considerations is the existing market environment, including potential clients and existing competition. Advertising and promotion strategies must also be considered, along with selecting a name for your new business venture.
Other important considerations are related directly to your company’s bottom line. Relevant local, state, and federal laws must be considered. Potential lenders and investors will also want detailed information about funding sources and ongoing income streams. Staffing, technology, equipment, and insurance are also essential considerations for a new business.
Types of Business Entities
Once you’ve addressed the basics of forming a new business, the next task is choosing a business entity. Four of the most common business entities are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each entity type has both advantages and drawbacks.
Sole proprietorships are among the most common business entities. Little or no paperwork is required to launch a sole proprietorship, especially if you use your own name. However, sole proprietors are personally liable for adverse actions taken against the business. While you should have a separate business bank account, business profits and losses are reported on personal federal and state income tax returns.
Partnerships are a common choice for legal and medical practices. They are businesses with more than one owner. There are two types of partnerships: limited partnerships and limited liability partnerships (LLPs). In a limited partnership, one general partner holds personal liability and broad control over the company’s dealings, with additional partners who have limited liability and limited control. By contrast, in an LLP, control is equally divided among all partners, with each partner personally protected against legal action against the partnership. Like sole proprietorships, partnerships are relatively easy to form. However, partners in a partnership report profits and losses on their personal income tax returns.
Limited Liability Company (LLC) entities provide protection against personal liability for LLC members for adverse actions taken against the business. At the same time, the LLC is not liable for so-called double taxation imposed against corporations, which must file separate income tax returns. Instead, each member of an LLC files separate federal and state income tax returns. Laws governing LLCs vary from state to state and can be complex to navigate, so it’s best to confer with an attorney when setting one up.
Corporations can take three major types: “C” corporations, “S” corporations, or nonprofit corporations. “C” corporations are what many people associate with corporations. “C” corporations must file separate income tax returns, and officers of “C” corporations must file individual tax returns. This is commonly known as double taxation. “S” corporations are also separate legal entities, but are not subject to double taxation. However, there are strict limits placed on the size and composition of “S” corporations. Nonprofit corporations are formed to perform charity, religious, scientific, or other types of operations that are not profit-oriented. Nonprofit corporations are exempt from federal taxation, but must meet rigorous regulations to qualify for tax-exempt status.
As you can see, choosing a business entity can be confusing and even overwhelming. If you’re considering starting a new business venture, Giddens & Gatton Law, PC, can help determine the business entity that is right for you.