New business owners may feel overwhelmed by the number of decisions they have to make when forming a business. They may wonder what their options are when forming a business. Business formation should not be a decision new business owners worry about if they are armed with the different business types and how evaluate which option is best for them.
How to evaluate the best business form
There are several different business forms including a sole proprietorship, partnership, limited liability company (LLC) or corporation. There are several different factors to use to evaluate which business form option is best including:
- Personal liability: Personal liability is one factor to base which business form option is best on. Some business forms, including limited liability companies and corporations provide personal liability protection for the owners, whereas sole proprietorships and partnerships do not.
- Taxation: Different business forms are taxed differently. Partnerships and sole proprietorships are taxed on the business owner’s personal tax returns. In the case of corporations, the corporation is taxed and the owner’s earnings from the corporation are also taxed. Limited liability companies allow the business owner to determine how the business will be taxed.
- Control of the company and ownership: A sole proprietor has greater control over the business than in the corporate business structure. Sole proprietors have complete control over the business somewhat similar to partnerships that are controlled by the partners according to a partnership agreement.
- Ability to raise capital: Certain business forms may allow the business owner to raise capital with greater ease. If this is a concern for the business owner, they should be familiar with the impact of the business form selected on the business owner’s ability to raise capital.
- Cost of running company and regulation: Different business forms have different regulations, requirements and costs associated with them. For instance, corporations can be more costly to own and operate because they are typically more heavily regulated.
Business formation has a significant impact on the early stages, middle stages and future of the operation of any business. To help the business enjoy success at every stage, it is helpful to start off on a good foot by thoughtfully selecting the best business form for the endeavor.