New Business: Some Considerations for Entity Selection

When starting a new business several considerations need to be taken into account when deciding what form of business entity, if any, will be used to conduct that business. Every business has it's own unique circumstances, however, there are two major benefits that can come with forming a business entity.  First, entities formed pursuant to a state statute give owners the benefit of "liability protection."  Second, there is a great potential for tax savings coming in the form of a reduction of self employment taxes. 

If you are planning to have your business either make or owe money at some point, you will probably want to form a business entity.  If your business is making money, then it will have taxable income which will raise the need for you to think about how you want to be taxed.  If your business involves services, there is a great chance of tax savings by electing corporate taxation under Subchapter S.  Subchapter S taxation is available whether you opt for a Corporation or a Limited Liability Company (LLC), therefore, this would not be the deciding factor when choosing an entity. 

If you plan on your business taking on any debt or having vendors that will need to be paid, you will want to have liability protection.  Absent a personal guarantee, the liability protection that comes with business entities will result in the business, and not you individually, being the party responsible for payment of debts.  The limited liability benefit can be achieved with both a Corporation and an LLC.

One of the more important, and often overlooked, considerations is how and by who you want your business managed. This can often come down whether you have partners are and how formalized you want that relationship with your partners to be.  Because the IRS has issued the "check the box" regulations allowing your business to essentially check a box and choose its ideal tax regime (with some limitations), management should be one of the primary considerations when choosing an entity. In the coming weeks, I will introduce both business entities and the various tax regimes in order to provide you with the menu of options for your new business.