As you prepare for establishing your new business, it is essential to consider the formation of your business and what type of entity your new company will become.
The process of learning about the different types of entities can be overwhelming. Choosing the right formation for your business can help you protect your company as well as your personal assets.
Each type of business structure can have advantages and disadvantages. Here’s an overview of the most common types of business entities and when they tend to be the most useful.
Some structures are simple
Two of the most common entities that new business owners choose are a partnership or a sole proprietorship. Both of these entities are relatively simple to form but also come with significant risk if the business is not successful. In both cases, the owner (or owners, in the case of a partnership) can be held personally liable for the business’s financial obligations.
Considering a corporation
One way to distance yourself from the financial obligations of your business is to form a corporation. When you make your business a corporation, it takes on some of the same attributes as a person; it can incur debt, pay taxes and be held liable for decisions.
The advantage is that a corporation creates a veil that separates your personal liability from the liability of your new business. However, a corporation can require significant book-keeping in addition to the substantial cost to form a corporation.
Many opt for a hybrid
Many entrepreneurs are starting to look toward the limited liability company (LLC) as an option to combine some of the advantages of a corporation with the simplicity of a sole proprietorship or partnership. In some cases, an LLC can have the best of both worlds; a format to pass profits and losses to the owners while protecting personal assets from company liabilities.
Often, it can be challenging to determine what structure will work best for your business. As you look at the options for creating your company, you may need to talk to an experienced professional about what will be the best fit for your business.