What should I know about forming a business?

Forming a business can be a daunting task for someone who doesn’t have an understanding of where to begin. One of the first steps is to determine what type of business entity (corporation, LLC) would be best for your business. While some of the options below may appear quite similar, there are many nuances that should be considered based on the nature of the business, its growth and expansion plans, operations and potential sale.

Here is a description of a few options for a new business:

Corporation

Corporations have for many years been the preferred form of legal entity for businesses. It affords the protections of limited liability to owners, officers and employees, but also is flexible enough to enable a business to raise money from outside investors.

One option available is to establish the corporation as an S Corp. This option is available to individuals (not to other entities), and is often suitable for a small business that does not plan to raise money from outside investors. The key benefit is that the business will not be taxed and therefore avoids the potential for double taxation. Instead, the IRS will allow you to “pass through” the business activity and include it on your personal tax return. In other words, one of the benefits of an S Corp is that you may be able to save on taxes since the business activity is combined with your personal taxes and you only pay taxes on income at the individual level.

Limited Liability Company (LLC)

An LLC allows you to benefit from a combination of features that are similar to a corporation but you are also allowed “pass through” tax benefits similar to an S corp. LLC’s are known for being easy and flexible to operate, which is why many people choose this option. Start-up costs may be higher because it is essential to have an operating agreement between the owners.

Partnerships

Partnerships require two or more people to share the responsibilities of the business. Your business could be organized as a general partnership or as a limited partnership. Many business professionals like partnerships because they are less expensive than other options and ensure a financial or business commitment among two or more business partners.

If you are considering starting a business, you should consult with an experienced business formation attorney who can assist you in determining which option may be best for you.

Contact the experienced business formation attorneys at Hutner Klarish LLP to schedule a consultation.