Everyone who starts a business has different goals in mind. As a business owner, you know your business best, and you may want to know what kind of business formation is the right one to help you save the most money on taxes and to protect you against personal liability if something goes wrong.
There are a few common business formations that people usually start with. The first is a sole proprietorship. This is a good formation for someone who plans to be in control over all decisions and who will keep all the profits. Other entities include:
- Nonprofits (501c3)
- General partnerships
- Limited liability companies
The best option for you will be the entity structure that protects your business best. Here are a few things to consider.
- Your tax needs may dictate the formation you choose
If you would like to avoid having your business on your personal tax return, you may want to choose a limited liability partnership or corporation, since the business is taxed more directly. In sole proprietorships and partnerships, self-employment taxes need to be paid.
- You want protection against liability
Usually, having an LLC or corporation is better for protecting yourself against liability in the case of a lawsuit. If you’re a sole proprietor, you could end up facing a lawsuit directly and have your personal assets put at risk.
- You want to work with another person
If you plan to work with someone else who will run the business with you, then a partnership may be the right choice for you. Corporations generally have a single head of the company, but this can vary.
There are different formations available, so it’s a good idea to look into the tax implications of choosing one over the other as well as the protections you gain by choosing one other than a sole proprietorship. Remember, you can always start with one kind of business formation and then decide to move forward with a different type in the future, so this is a structure that may be somewhat fluid while you run your business.