How to Decide What Type of Business Entity You Need

Choosing the right business structure is important, especially if you’re going to be self-employed. While you might think you can benefit from incorporating, it’s not always ideal. It boils down to the type of business you’re starting, where you plan on working and how you want your taxes structured. While you should always consult an attorney, there are still some ways to get a jump start on figuring out your entity.

The Types of Entities

The type of entity you select depends on your liability, taxes, and record-keeping skills. There are four main types of business structures, which include:

  1. Sole proprietorship
  2. Partnership
  3. Corporation
  4. Limited Liability Company or LLC

Location

Legal websites like often state that location matters when choosing your business structure. For example, if you plan on working out of your home, you don’t always need to incorporate your business. If, however, you plan on operating out of an office or location that isn’t in your home you might want to consider incorporating. Decide where your business will be run. Even if you’re starting in your home, ask yourself how soon you plan on upgrading to an office or official business location? If you only plan on working out of your home for a short while, you may still want to incorporate your business.

Liability

Ask yourself how you want to be protected from legal liability. For example, if you have to purchase a lot of equipment, do you want to be personally responsible for that equipment if it breaks, fails or causes an accident? Consider how much risk you can afford on yourself and how much you want the business to handle. According to LegalZoom, it is in your best interest to protect your personal assets. Therefore, if your business has a lot of risks it might be better to shift the liability from yourself to the business, which means incorporating yourself. If, however, you won’t have a lot of liability, you can get away with a sole proprietorship or partnership situation.

Taxes

What are your income goals with this new business venture and what opportunities are there to minimize how much you’ll pay in taxes?

There are a lot of tax opportunities for corporations compared to partnerships and sole proprietorships. This is because corporations have a lot more tax breaks. Corporations, however, also have to deal with double taxation, which can hurt yearly revenue. You could avoid this by filing for S corporation status. S corporations are allowed if you have less than 70 shareholder returns.

Record-Keeping

Record-keeping is important no matter what type of business entity you choose, but some types will require more focus on record-keeping than others. Consider the time and money associated with recordkeeping and how much you’re willing to spend to keep your records in order. Corporations are required to keep records more extensively than partnerships and sole proprietorships, which means you’ll pay for the right software or professional to keep your records.

Consult an Attorney

No matter what, it is important to consult an attorney when you’re picking your business entity. An attorney may have insight based on your state’s laws and the forms you’ll need to file to start your business based on your entity type. Websites like LegalZoom reviews and offers quick access to attorneys as well as access to forms so you know how much work is involved in your business structure selection.

Future Needs

It’s important to remember that your business is going to grow and hopefully, be with you for a while. When you select your structure you cannot pick it solely based on today, you must also think whether or not that structure will work in the future. For example, where do you see your business in five years? Seven? Ten?

The business structure you originally start out with might not meet your needs in 10 years or even three years. Often sole proprietorships graduate into other partnerships or corporations as the owner’s needs and company changes.

Take Your Time

No matter what, it’s important to take your time with this decision. Starting a business costs money and the licensing and fees associated with your structure are a good portion of those upfront costs. Sit down and write out the pros and cons of each entity and see which works for you today and in the future. Then, meet with an attorney or get legal advice to verify you’ve made the right decision. By picking the right structure from the start your business is already on a positive route for success in the future.

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