Business formation is an important part of starting up a business. Selecting the best business form involves considering the needs and goals of the business along with an evaluation of personal liability, taxation, management and control of the business and costs of running the business all of which are impacted by the business form the business owner chooses.
There are several different business forms to consider which may provide pluses and minuses for the business owner based on their answers to those questions. A sole proprietorship is the simplest business form to run, however, it also provides no protection against personal liability. The tax structure is also considered pass-through because it is passed through to the sole proprietor’s personal tax return. Similarly, a partnership is taxed in the same manner on the partner’s tax returns but partnerships can be more complex than a sole proprietorship to set up, run and end according to a partnership agreement. Partnerships also do not provide personal liability protections.
Another business form to consider is the well-known corporation. Corporations provide personal liability protection but are also more complex and costly to run and have a greater number of rules and regulations to comply with. In addition, they are sometimes considered double taxed because the corporation and the shareholders pay taxes. Limited liabilities are a fourth option to consider which provide limited personal liability for business owners and allow them to select if they will be taxed as a partnership or corporation.
Selecting the best business form is a critical step in starting a business. The importance of business formation should not be ignored or overlooked which is why new business owners should be familiar with the different business forms and how they work when starting a business.