What type of Business Entity Is Best For Your Small Business?

One question I’m often asked by prospective small business owners is, What form should I use operate my business? Should I be a sole proprietorship, a corporation, an S Corporation, or an LLC? Actually, this is one of the most important, if not the most important, questions that a business owner can ask because the form or type of business entity that a business operates under will have enormous legal and tax ramifications for that business.

Starting or acquiring a new business requires deciding what business form to use. A business entity is the legal form of the business. A business entity may be as simple as a sole proprietorship or as complicated as a corporation with publicly traded stock. The choice of business entity is often driven by tax considerations. The type of entity that a business venture chooses will significantly affect its tax treatment under federal, state, and local laws, and maybe even foreign laws. Therefore, it’s very important for a prospective business owner to understand the tax treatment of any type of business entity he or she may be considering.

However, although taxes are one major factor in making the decision about form of entity, taxes certainly are not the only factor. Tax advantages of a particular form of business ownership must also be considered along with business law advantages as well as the economic realities of a business or entity.

In the United States, a number of business entity choices are available for anyone considering starting a business.

Sole Proprietorship

A Corporation which can be a regular C corporation or can elect S Corporation status for tax purposes

General Partnership

Limited Partnership

Limited Liability Partnership (LLP)

Limited Liability Limited Partnership (LLLP)

Limited Liability Company (LLC)

Deciding which form of business entity is best for any particular business can be complicated as there is no single form of business entity that is ideal for all businesses in all situations. Each form of business entity has advantages and disadvantages.

The most significant factors to consider in choosing the best business entity are

Which entity provides the best liability protection

Which entity provides the best tax advantages.

To give some insight into the advantages and disadvantages of each type of business entity, I’ll be doing a series of blogs on each type of business entity. Please check back next week as I’ll be looking at each type of entity in more detail.