How do I choose the right type of business entity for my new company?

  • By:David Bate

Business Attorney

If you are in the process of forming a new company, you may benefit from the legal guidance of a business lawyer. One of the first thing that is necessary to do is to choose the type of business entity. This decision will be binding and carries possible tax burdens so it’s critical to make the right choice from the very beginning. This can be challenging when individuals do not have a depth of understanding regarding the various types of entities. They can guide you through this process. From start to completion, a business lawyer can provide the information you need in order to make an informed decision. There are four main types of business entities from which to choose:

  • Sole proprietorship
  • Partnership
  • Limited liability company (LLC)
  • Corporation

What factors should I consider in making my choice for the type of business entity?

When meeting with our business lawyer, you will have the opportunity to share your circumstances and business goals. Because everyone’s situation is different, it’s important to consider several factors in choosing the optimum type of entity in advance of forming a new company. Typically, the following criteria is what is used as the basis for making that decision:

Tax Obligations

  • The annual revenue generated by a C corporation is subject to state and federal taxation. Individual shareholders who earn revenue based on their company shares must pay taxes on that revenue when paying their personal income taxes. This is referred to as double taxation.
  • The annual revenue generated by an S corporation is subject to state and federal taxation to be paid only by the revenue earned by the corporation’s owners and investors. S corporation and LLC owners are subject to paying self-employment taxes on their salaries and personal profits.

Personal Liability

  • Ownership is separate from management when it comes to corporations, limited partnerships, LLCs. This usually protects the business owner if they are sued.
  • General partnerships and sole proprietorships do not protect the company’s owner which means they can be held personally responsible for the decisions they make on behalf of the company.

– Ease of Ownership Transference

  • At some point during the lifetime of the business, one or more owners may wish to disengage and transfer their ownership to another individual. This is very easy to do with a C corporation or an S corporation because ownership is based on the shares or stock they hold in the company. They simply need to sell their shares. However, transferring ownership is more complex but can be greatly simplified with the assistance of a business attorney Rockville, MD trusts. The partnership or sole proprietorship must be terminated and the business sold to the new owner.

Thanks to The Law Office of Daniel J. Wright for their insight into business law and choosing the right type of business entity.

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