Choosing a Business Entity

The business world is rife with risk. Lawsuits from competitors and customers are, unfortunately, on the rise. To protect yourself and your business, you need to take steps. This means forming a business entity.

In making the decision, it is important that you understand some of the verbiage commonly, and incorrectly, used. You will be told this is all about incorporation, but it really means the choice between a corporation, LLC, and other entities.

As a business owner, you are faced with a wide variety of choices when it comes to business entities. Each has strengths and weaknesses. Some have been around forever such as the corporation while others are new.

Ironically, the most popular form of business entity is not an entity at all. It is the sole proprietorship. It is a dangerous form of business. As the business owner, you are exposed to personal liability for business debts.

The second most popular choice is the partnership. This occurs when two or more people pursue a business venture together. Many people are in partnerships and don't even know it. As with the sole proprietorship, there is no liability protection in a partnership.

Although the partnership is often a default situation, it is form of business that can be elected. Why would someone form a partnership? Primarily for flexibility and tax purposes. There are no corporate formalities and taxes flow to the partners' returns.

A relative new and popular entity is the limited liability company. Referred to by its abbreviation LLC, this entity offers the flexibility of a partnership and the liability protection of a corporation.

When something is touted by politicians as an answer, one should be wary. The same holds true for the LLC. Yes, it offers flexibility and asset protection, but it also comes with outrageous taxes and fees that make it a less attractive choice.

The corporation is our next subject of discussion. It is the oldest formal business entity. It provides ironclad liability protection when run correctly. This means people that invest in the entity are not personally responsible for its debts.

On the downside, a corporation requires a fairly extensive number of formalities to be followed. For many small businesses, this means an attorney is required. Attorneys cost money, which is often something many small businesses do not have plenty of.

So, which business entity should you choose? There is no correct answer and there are many more issues than you might imagine. It is best to speak with an attorney or accountant to make the determination for your specific situation.

Article Source: http://www.rightbiz.com

Richard A. Chapo provides affordable legal services to help people incorporate in California via his site at SanDiegoBusinessLawFirm.com.

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