For any entrepreneur, selecting the right business entity is critical. Your choice will affect such issues as the amount of taxes you pay, ownership control if multiple owners exist as well as personal liability issues. You need to determine which entity such as a limited liability company, corporation or nonprofit – will put your company in the best financial position as well as reach your goals.
There already remains a great amount of risk when starting a business. You do not want any unnecessary ones to surface. Ignoring the right kind of business entity is one such unnecessary risk. Your decision provides you with the direction you and your company will need as you hope to achieve success. And you wonder what type of business entity to form for you nascent company.
Tax advantages and liability protection
Here are some of the types of businesses entities to consider for your company and their advantages:
- Limited liability companies (LLCs): Most often directed toward smaller companies that often are sole proprietorships. One advantage of an LLC includes protecting its owners from debts and judgments against the company. Your personal assets cannot be used to pay for any liability claims. Another advantage is that an LLC provides certain tax benefits.
- Limited liability partnerships (LLP): With partners involved, each one contributes their own expertise while also spreading any potential risks. In addition, an individual partner’s liabilities are limited to the amount of money they invested in the business. Also, if the LLP flounders, creditors cannot seize a partner’s assets.
- Professional corporations: Such entities receive favorable tax treatment and liability protection. Owners are not personally liable if the company goes bankrupt or challenged through litigation. In these situations, just the company’s assets are seized in order to pay off creditors. Among the tax advantages: salaries and bonuses of owners and employees are tax deductible.
- S-corporations: This vehicle provides limited liability protection no matter the tax status. This means a business owner’s personal assets receive protection from any judgments made against the company by creditors in matters that include litigation or contracts.
- C-corporations: Besides lowering tax burdens, many other advantages surface with C-corps. For example, they allow business owners to accrue funds needed for business growth; deduct salaries of owners and employees for tax benefits; and deduct charitable contributions as business expenses.
- Nonprofits: A nonprofit qualifies for income tax exemption. Once established, many nonprofits remain exempt from state and local tax laws. This fact also proves advantageous when seeking investments. By donating to your nonprofit, individuals also reduce their tax liability. In addition, the private assets of the founder remain separate from the nonprofit’s, thus protecting them from creditors and courts.
Once you have established your business, it is just a matter of time before progress takes place. Always look to the future, study trends and markets and prepare to pivot if necessary.