What Type of Business Entity Should I Form?

Type-of-Business-Entity

One of a startup’s most important decisions will be selecting a business entity that suits its specific needs. The selection of a business entity impacts the manner in which a startup’s owners are exposed to liability, are taxed, and are able to raise capital through the sale of stock. It will also affect the number and types of documentation a startup will be required to file with the Secretary of State of the state in which it forms.

The selection of one business entity may be appropriate for one startup and yet not for another very similar one. A startup should carefully evaluate and consider its long-term goals and objectives prior to forming its business entity. Experienced business attorneys can work with the startup to identify which business entity will best meet the startup’s needs. These needs can include minimizing liability, facilitating future acquisition, or even implementing favorable tax structures.

Some of the most commonly used business formations include:

CorporationsPerhaps the most well-known business entity, a corporation is a legal entity that is owned by shareholders. Corporations allow for several shareholders to participate in the ownership of the entity and those shareholders are shielded from personal liability, as the corporation remains responsible for its business debts and obligations. Corporations tend to be better suited for larger, more well-established businesses.  Even further, there are different forms of Corporations that need classification depending on the different IRS code.  The C-corporation is the most common and standard form of corporation.  The S-corporation is less common and has alternate benefits and restrictions.

Partnerships – A startup can exist as a partnership without taking any legal steps to form a company whenever two or more individuals mutually agree to work together in a common enterprise. In a partnership, the partners share in the enterprise’s profits and losses. In addition, partners are jointly and severally personally liable for the financial obligations of the partnership and profits or losses pass through to the partners for the purposes of taxation. While no documentation is officially required, it is always wise to have a partnership agreement in place.

Limited Liability Companies (LLCs) Although an LLC has only been a type of business formation since the 1980s, it has quickly grown in popularity. Favored by many startups and small businesses, the LLC is a hybrid of a partnership and a corporation. Owners are able to take advantage of limited personal liability similar to that of a corporation though the LLC is treated like a partnership or sole proprietorship for taxation purposes. There are many benefits to starting an LLC, but it could be damaging for some businesses.

Sole Proprietorships – A sole proprietorship is perhaps the most common type of business that exists today. A sole proprietorship may exist whenever an individual is engaged in business for him or herself. Thus, single-owner startups may engage in business without incorporation, though a fictitious name should be filed with the state. Unlike corporations and LLCs, a sole proprietorship does not insulate personal liability. Instead, the proprietor’s personal and business assets are all within reach of creditors. While this may seem like the easiest entity to create, it often carries the most risk.

Contact a California Startup Company Attorney and Schedule a Consultation Today

The implications of a startup’s decision regarding its selection of a business entity are too important to select one without consulting an experienced business attorney.  Because of the fluid nature of businesses, the advantages and disadvantages are not always clear when choosing which entity to form.  Depending on how the business is going to be run and where it hopes to grow to, will greatly influence the decision.  Startup Company Counsel’s knowledgeable business attorneys are prepared to assist you in electing the best business entity that strategically meets your business plan and long-term goals. Their startup attorneys can walk you through the pros and cons of each entity and help you to understand the best option for your business. Please do not hesitate to call us today at (408) 441-7555 or fill out our online form for assistance.

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