What Business Entity Is Right For You?
Starting a business is an exciting venture, but you have some very important decisions ahead of you. The choices you make today could have a major impact on the success of your business and its ability to grow in the years ahead.
The Law Office of David M. Mitchell, represents Oregon entrepreneurs and business owners in a wide range of business and commercial law matters. As you are considering starting a business, one of the first decisions you need to make is what kind of business you want to form.
Limited Liability Company (LLC)
LLCs are very popular business structures because they allow you to separate your personal and business assets. An LLC is considered its own legal entity, so if your business fails, your personal assets will remain safe. Likewise, if the business is facing a lawsuit or falls deeply into debt, you will typically not be personally liable for those costs.
LLCs are also taxed differently than corporations. Rather than pay the corporate tax rate, you are treated more like you are self-employed, a sole proprietor or a partner in a partnership. This may be more favorable from a tax perspective.
Corporations, like LLCs, are their own legal entity — but they are also their own entity for tax purposes as well. Corporations offer the most protection for your personal assets, but they also require more up-front cost and significantly more work to operate. You will typically need to follow strict reporting guidelines and operating processes; for example, you will be required to hold annual meetings, during which the minutes must be recorded.
Corporations have an easier time raising capital, as they have the ability to sell stock to shareholders. At the same time, however, corporations may face more taxes. Income could be taxed twice: once when the corporation makes a profit, and once again when dividends are paid to shareholders. They offer some of the most protections for owners but come with more restrictions than other forms of businesses.
Sole Proprietorship Or Partnership
Unlike an LLC or a corporation, owners are personally liable for a sole proprietorship (if they are the sole owner) or a partnership (if they are one of several owners). This means that if the business incurs a lot of debt, you may lose personal assets such as your home or vehicle to help pay for that debt.
Sole proprietorships and partnerships have many benefits, however. These are the easiest businesses to form, and do not require filing with the state. Your business assets are also intertwined with your personal assets, and you just pay personal taxes as you are self-employed in the eyes of the law.
It is possible, as well, to form a limited partnership or limited liability partnership, which combines elements of both a partnership and LLC. Under some circumstances, this may help shield your personal assets from any business liability you might face.
Which Is Best For You?
You have a lot to consider before launching your business. There are a variety of business formation options available to you, including some we have not shared in this list. We are here to help you evaluate all your options and guide you to the most favorable path forward for you and your business.