When starting a new business, you will want to decide whether to operate your business as a sole proprietorship or as a separate person by forming an entity. In rare instances, operating as a sole proprietorship is sufficient. However, in the vast majority of instances, you will want to form an entity to operate your business because, amongst other things, operating as an entity provides you, as the owner, protection from personal liability for the entity’s debts and obligations, provided you observe corporate formalities in maintaining the entity’s separate legal identity.
Selecting the appropriate type of legal entity for operation of your business requires various considerations, including, without limitation, how the entity is taxed; the extent of protection from liability the entity will provide its owners; the respective rights and obligations of owners and management of the entity; the expense associated with forming and maintaining the specific type of entity, including costs associated with observing corporate formalities; the number and identity of persons permitted to own equity in the entity; and whether and what kind of funding you may be eligible to receive from investors or other third parties.
The most common entity types are as follows:
- Subchapter “S” Corporations
- Subchapter “C” Corporations
- Limited Liability Companies (LLCs)
- Limited Liability Partnerships
- Limited Partnerships
- General Partnerships
- Professional Corporations (only available for certain occupations)
In addition to selecting your entity type, you will have to select the jurisdiction in which to form your entity. Each state has its own laws concerning business formation and operations, so the considerations discussed above will vary state-by-state.
Many business owners choose to incorporate in the state from which they will operate because regardless of where you form your entity, the state from which the business operates will typically require registration in such state, annual reports and annual fees, and the business will be taxed in such state. Prior to selecting where you will operate your business, it is important to consider the state’s employment and tax laws and regulatory environment, in addition to making the considerations discussed above.
Before selecting your form of entity or jurisdiction of formation, take the time to critically assess your situation. Professional legal advice is an invaluable resource in helping you make necessary considerations to help put your business in a position to succeed.