How to Choose the Proper Business Entity



For those who want to experience economic security and some freedom and privacy, starting your own business can be the first step.  To do this, you have to take the proper steps to make sure you do it all the right way.

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When thinking about how you’re going to start your business you need to decide what kind of business entity is the best for you.  There are many things to think about.  Do you want to protect the assets you have personally?  Will you need a loan? What will the character of your business opportunity be?  All these different choices come with positives and negatives.

Sole proprietor – One of the easiest options for a business entity is being the sole proprietor.  This essentially means that you are your business.  You are one in the same. You don’t have associates owning the business with you and when you want to become uninvolved in the company, it ends.  What is the advantage of being a sole proprietor? It’s simplicity.  The most you should have to do is maybe file the business with the county or city and get a business permit.  Other than that, not much more is involved.  You don’t even need a separate checking account since it’s essentially yours.

What are the disadvantages? Because your business is the same as you, you may need to think about protecting your personal assets.  If someone decides to sue you, your business assets and the personal ones can be at risk. With that in mind, if you have a lot of personal assets, you may want to go with a different business entity.

Corporation – The most common business entity is a corporation.  It is a business that’s separate from its proprietors.  It has separate assets as well as liabilities and has its own name, owner and checking account.  The biggest advantage of going with a corporation is that your own private assets are protected.  There are also tax benefits along with the nice image of being called a “corporation.”

What is the downside? You will have to follow specific rules based on the guidelines that your state has incorporated.  There are tax implications, shareholders meetings to hold and higher tax liabilities.  Of course, there is the cost of setting up a corporation which is a lot more than a sole proprietorship.

Limited Liability Company – Also known as an LLC, many people consider this to be the best of both words for a business entity.  It has the benefit of protection from personal liabilities when it relates to business circumstances.  There are guidelines but they are much less complicated than a corporation.  There is a specific tax advantage in that the owners can have the profits move through themselves.  Owners pay the tax personally based on the share they receive from the profits of the company.

There is a lot to think about when it comes to a business entity for your own business.  Of course you do have the option later on down the road to change the type of business entity you are, but its much less expensive and time consuming to choose the right one and stick with it from the beginning.

Do your own research and make sure you choose the business entity that is best for you.

 

About the author: Steven Henning writes about finance, investment, and home equity loans.