Which Business Organization Type Should I Select?
Here are some questions to ask yourself as you consider what business legal form to use:
How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
Sole Proprietorship
To start a sole proprietorship, all you need is a business license for your city, possibly a “fictitious name” statement, and a business checking account.
Partnership
To start a partnership, you will need an attorney to help you with the partnership agreement.
Limited Liability Company (LLC)
To start a Limited Liability Company, you will need to apply to your state Secretary of State to become an LLC, by filing Articles of Organization. You may be able to do this filing yourself, or you can get an attorney to help.
Corporation
To start a corporation, you will need to pay an attorney to help you set up your corporation correctly, in the state where you will be operating, including a corporate charter and by-laws.
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.
How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don’t incorporate.
Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.
Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.
What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision.
In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.
Still confused about business legal types? Sign up for my free online course Guide to Types of Business. You will receive seven email lessons in seven days.
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