By: Esqueda Law PLLC
The “how to”, and things you MUST consider before choosing your business entity
Probably the first most important decision you can make for your company is determining the best type of business entity it will be. Why? Because this single decision is key to the smooth operation of your business. The type of entity or legal structure you select can essentially determine liability, taxation, and continuity of your business in the event of death.
Now, there may be multiple business structure types that may work, but to find the most suitable, you need to consider the following:
- To what extent would you want to be liable for financial losses
- How much cost are you willing or able to spend on operation costs
- Can your business continue without you
- How can you minimize or reduce taxation
A sole proprietorship has no protection for personal liability. Neither does general partnership. As the sole proprietor, you are responsible for all financial obligations. With partnerships, these responsibilities are shared, but they are still personal responsibilities. The benefit of corporations is that they protect you from personal liability. Debts and obligations of the business are separate from your assets.
Start-up costs for any business include one-time expenses and ongoing expenses. Before starting your business you need to budget to include all potential costs. These include equipment, office rental, salaries, website and branding, technology, insurance, stock, consultation of professional accountants, lawyers, health and safety inspectors, etc. Larger corporations are going to run into much higher costs. Corporations also have additional annual costs, filing costs, and initial costs for formation which must be legally filed with the state.
In a sole proprietorship, taxes are put on the personal income of the owner. This means you are only taxed once. The same goes for partnerships. However, corporations also offer tax savings for self-employment. Taxes would be charged only on the portion of earnings allocated to salaries and not on the entire earnings of the company. The decision here should be based on how funds are allocated within the business. Also note, C corps are ‘double taxed’, first as a business, and then again in shareholder dividends. There is also an unemployment tax for shareholders in a corporation. This does not apply to sole proprietors or partnerships. An S-corp may avoid some of the various taxes on corporations.
In a sole proprietorship, the death of the sole proprietor means the death of the business. Partnerships allow the possibility of selling the deceased’s shares. In corporations, ownership can also be sold as a whole, without disruption of the flow of business. Shares can also be passed on to family members in the event of death.
There are many different considerations when choosing your business structure. Each type comes with its pros and cons. When deciding the structure of your business, you do not want to do this alone. There are professionals here to make this job easier for you. My name is Liza Ann Esqueda and I am here to help.
Need to strategize? Schedule a free constellation TODAY. Book a free 15-minute call: HERE Liza Ann Esqueda is a trademark & small business attorney specializing in trademarks, copyrights, and contract templates. Liza Ann runs a virtual attorney, serving clients nationwide. Visit: LawyerLizaAnn.com for business tips, free downloads, and course information.