During the start-up phase of a business, there are many important decisions to make and one is which type of business form to use. For that reason, new business owners need to be aware of the different business formation options available to them.
There are several different business forms to choose from. Business owners should evaluate the different business formation options based on personal liability implications, taxation implications, control of the business and costs of operating the type of business form selected.
Sole proprietorship
A sole proprietorship is the simplest business form. It does not provide personal liability protection but is the least expensive or costly business type to operate. The business owner is taxed for the business on their personal tax return.
Partnership
A partnership is similar to a sole proprietorship in some ways but includes two or more partners. It does not provide personal liability protection and is also taxed on the personal income tax returns of the partners. It is typically operated according to a partnership agreement established between the partners.
Corporation
A corporation can be more complicated and expensive to operate, however, it provides complete personal liability protection for owners and shareholders. It is sometimes referred to as double taxed because the earnings of the corporation are taxed and the owners and shareholders also pay taxes on their personal tax returns.
Limited liability company
A limited liability company provides personal liability protection for its members and is operated according to an agreement between the members. The members can elect to be taxed as a partnership or as a corporation.
Understanding the different business forms and how they work can help business owners select the best business form for their new venture. Starting up a business can be challenging but familiarity with the legal tools available to help guide the new business owner can be beneficial.