The law allows different business options to suit the varying needs of people and business entities. The main types of business forms available are the sole proprietorship, partnership, corporation, S-Corporation, and LLC (Limited Liability Company). Choosing the right business structure depends on your particular circumstances such as the type of business you want to run, the cost of formation and maintenance, and the types and amount of liability that you are willing to assume.

The type of business you want to run may impact your available options. For instance, if you are a profession, for example, attorneys, architects, accountants and doctors, and want to start a professional business you will not be able to start a corporation. This is in contrast to most other types of business, which can use any business form they would like. As an alternative you would be able to form a professional corporation which has some of the protections of a corporation but not the same limited liability as an ordinary corporation. In most cases the type of business you choose will not be a hurdle to what type of business formation you can choose.

The cost of formation and maintenance of the business form can be a significant factor to consider. The corporation would be the most expensive form to create and it would also have significant costs during operation. During operation of a corporation there are additional costs associated with creating regular financial records, annual reports, tax returns, and other activities that are unique to having a corporation. You may also want to consider if any assets the business will have may appreciate. In the event you dissolve an s-corp or c-corp the assets are distributed to the owners and any gains realized become taxable income. For this same situation in an LLC you are considered to own the property so there is no distribution and no new tax obligation.

Financial needs may be a concern for those considering larger endeavors. It is difficult to raise money as a sole proprietorship as your only available source is maybe a bank and your own funds. Partnerships could allow more capital as well as each partner would bring in assets. Clearly the corporate structure offers the best opportunity to raise capital and using stock options in the future can be a way to motivate employees. However, selling the stock loses control of the business and if you have no plan to go public an LLC can offer the same liability protection without the added complexity of a corporation.

Finally the liability you are willing to assume is usually the key area that most consider before forming a business. Many look to the corporation due to its ability to limit your personal liability. This means that if the corporation is sued only your business assets are on the line and not your personal assets. However this form maximizes your tax liability because you are taxed at the corporate level and then taxed again at the personal level for distributions from the company. A sole proprietorship is the mirror image as far as liability is concerned and you could lose all of your assets in a lawsuit but you are only taxed once at the personal level. LLCs and partnerships can use the same flow through nature of sole proprietorships, but also offer more protection from legal liability. However a corporation, or s-corporation may be ideal for tax savings if you don’t plan on working there actively, because you are allowed to distinguish between active and passive income which is taxed at a lower rate.
This article only gives a cursory glance of the factors that you should consider when choosing a business form. An attorney can walk you through your options, using your needs and considerations, to find the right business form for you.