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Things to keep in mind when choosing a business entity

On Behalf of | Feb 6, 2023 | Firm News |

Launching a business can be exciting and intimidating, especially for new entrepreneurs. A crucial decision involves what entity to form for the new company.

An intelligent choice of ownership structure can lay the foundation for success or struggle in a business. Potential proprietors can compare various factors to determine the advantages of each type.

Tax implications

Many small businesses desire the benefits of pass-through taxation. This principle means the government does not levy taxes on company earnings twice. Double taxation typically happens with C corporations.

Sole proprietorships and general partnerships do not require much or any paperwork in some cases and let owners pay at a regular individual or household tax rate. However, the format does afford the protections of other entities. Many new business owners settle on using a limited liability company, which eliminates the issue of double taxation.

Legal liabilities

The advantage of forming a separate entity is that any legal action or liabilities against the company do not put a business owner’s personal property in jeopardy of seizure. For example, if an accident occurs on a property, the lawsuit can only go after assets in the business.

The ability to set up other holding companies for business assets can even offer protection for company property. For this reason, S corporations and LLCs are favorites among new business owners.

Organizational flexibility

Corporations have advantages when a company becomes large but often require organizational structures that are challenging to change. LLCs have an edge over smaller operations because of the freedom to adjust management and organization as an owner wishes.

The decision of a business entity is not necessarily straightforward. However, a careful review of the facts can lead owners down a wise path.

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