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The importance of carefully selecting a business form

| May 12, 2020 | Banking & Business Transactions |

New business owners do not want to start their business out on a bad foot which is why they should take care to carefully evaluate the selection of a business form that will meet the needs of their developing business as it gets off the ground and begins to grow. Because of the importance of the decision, business owners should be familiar with the different business forms available to them to choose from.

Different business forms have pluses and minuses which may be viewed differently based on the needs of the business and the goals of the business owner or entrepreneur. Business forms can be evaluated based on start-up and maintenance costs; taxation; personal liability; and the amount of control the business owner will have over the business. A sole proprietorship is the simplest business form which allows a high level of control for the business owner and pass-through taxation to the owner’s personal tax form but does not provide protection against personal liability.

Partnerships are another business form that is similar in terms of taxation and personal liability to a sole proprietorship, however, there is more than one business owner which can impact management, control and ending the business relationship. Corporations are another well-known business form business owners may consider. Corporations provide protection from personal liability but can be costly to operate and are sometimes considered double-taxed because the corporation’s earnings and shareholder’s dividends are both taxed. Lastly, limited liability companies provide limited personal liability for business owners and can either be taxed as a corporation or partnership based on the selection made by the business owners.

There is a lot to consider when starting up a business and one important decision that must be made includes which business form to select. Business law can provide useful tools and options for business owners that they should be familiar with so they can leverage those tools to better set themselves and their businesses up for success.