Which Business Entity is Right for You?

So you’re starting a business, or thinking about it - congratulations! Entrepreneurship is one of the key elements of a thriving economy.

While you will likely hear from myriad sources around you that you should create a business entity, there are certain factors you need to consider when making this important decision. While a business entity - corporation or LLC (Limited Liability Company) - may indeed be what’s best for you, the standard reasoning is not always sound, and you need to do your homework.

You may be told that forming a business entity will protect you and your assets from litigation should something go wrong in your business, and to some extent this is true, depending on the business entity you have chosen. There are, however, some very important distinctions between the various business entity options available to you, and it is critical that you understand these, and choose the most appropriate entity to suit your current and future needs.

There is more than just liability involved; of course you want to be protected from lawsuits, but there are other issues to consider, such as your responsibilities to a potential board of directors, what will happen to the business assets in the event of your death or incapacitation, and even in the event of a lawsuit. What if you hold all your valuable assets in the business, and the business does, unfortunately, get sued? Having protected yourself from personal liability, you may still stand to lose everything you have worked so hard for. Is this really a good solution?

Also consider the people with whom you are involved, and what type of growth, acquisitions, etc. you may wish to to pursue in the future. The law holds very specific rules for different business entities as to what different partner- and business-types can and cannot do, for instance, and what happens when a partner wishes to secede or dies.

There are also tax consequences to consider, and they vary from entity to entity. You need to be clear about the operating circumstances of your business and what suits you best, as well as where you may want to take your fledgling company.

While these concepts are complex, they need not be overwhelming. You need to procure the the advice of professionals who can help you make the best decisions; namely lawyers and accountants.

While the price for this advice may seem a high one to pay at the outset of your business, the price of forming the wrong entity (for you) and dealing with treacherous partners or clients, lawsuits which leave you unprotected, or the loss of your business, will be a much higher cost later. This later cost could also include the cost of any professional help you may need to hire to get you out of the mess you are in.

Best of luck with your business entity decision, and may you experience outrageous success!

SM Arthurs