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Starting a Business - Choosing the Type of Business Entity

Jeff Robinson

January 14, 2015

If you are considering the possibility of starting a new business, there will be many decisions to make along the way. One of the first decisions relates to the type of business entity you will establish for your business operations.

When choosing a business entity, it is important to understand that there is no one perfect entity. The goal is to make the best choice based on the facts and circumstances you know today or can reasonably anticipate over the next three to five years.

There are four categories of business entities to choose from:

  • Sole Proprietorship or Single-Member Limited Liability Company
  • S Corporation
  • C Corporation
  • Subchapter K Entity (partnerships and multi-member limited liability companies)

A Sole Proprietorship is a single owner unincorporated entity that is easy and quick to start. As the name implies, this form of business is not appropriate for multiple owners.

An S Corporation, C Corporation or Limited Liability Company can be owned and operated by a single owner, but are each also suitable for multiple owners. These entities are formed by filing the proper document in accordance with state law (articles of incorporation or articles of organization). This is a more formal creation process than with a Sole Proprietorship. Like the Corporation and Limited Liability Company, a Partnership is suitable for more than one owner (or partner) and requires more time to form and start than a Sole Proprietorship. These entities are created upon application to the state for recognition as a legal entity. The level of complexity for the operating agreement or similar document may depend on the flexibility desired in its operations.

Adding to the decisions, a multi-member limited liability company defaults to a partnership tax treatment but can elect to be treated as a C Corporation or S Corporation for income tax reporting even though its legal form is as a Limited Liability Company under state law.

In addition to the number of owners and ease or complexity of formation, each entity has unique advantages and disadvantages which must be considered and should be reviewed from a tax and accounting perspective as well as a legal viewpoint with your attorney.

Please contact us at 804.270.6980 if you have any questions or would like to discuss this or other accounting and tax matters.

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