Choosing the Right Business Entity

Choosing the correct legal structure for your business is one of the most important decisions a business owner can make. Your choice will affect taxes, liability, ease of operation, and the ability to raise capital, among other critical factors. This decision requires more than just filling out an online form—it involves careful consideration of your long-term business goals and legal obligations. The business attorneys at Ferikes Bleynat & Cannon can guide you through the process, ensuring you make an informed decision that best suits your needs.

Each business structure has its own set of advantages and disadvantages. Below is an overview of the most common business entities, which can serve as a starting point for your decision.

Sole Proprietorship

A sole proprietorship is the simplest form of business ownership and is limited to one individual owner. In this structure, the business and the individual are treated as one legal entity.

Advantages of a Sole Proprietorship:

• Complete control by the owner
• Simple to operate
• Income and expenses are reported as personal income and expenses on the owner’s tax return

Disadvantages of a Sole Proprietorship:

• No protection from personal liability for business debts or legal issues
• Limited ability to raise capital
• Some business tax benefits are not available

Partnership

A partnership is created when two or more people engage in business together as co-owners. Partnerships are classified as either general or limited. In a general partnership, each partner shares liability for the business’s debts and actions. A limited partnership allows some partners to have less control and liability than others.

Advantages of a Partnership:

• Fewer formalities and paperwork compared to a corporation
• Pass-through taxation, where profits and losses are reported on individual partners’ tax returns

Disadvantages of a Partnership:

• Liability for the actions of other partners in the business
• Raising capital can be challenging, as partners may need to contribute funds or seek outside investors

Corporation

Corporations are created by filing Articles of Incorporation with the Secretary of State, forming a separate legal entity distinct from the individuals who own it. Corporations can take various forms, and it’s essential to work with a Certified Public Accountant (CPA) or tax professional in conjunction with our attorneys to determine which type of corporation—such as a C Corporation or S Corporation—is best suited to your business needs.

Advantages of a Corporation:

• Protection against personal liability for business debts
• Ownership interests can be easily created and transferred
• Easier to raise capital through the sale of stock or shares
• The business can continue operating after the death of the owner(s)

Disadvantages of a Corporation:

• Must maintain corporate formalities, including annual meetings and record-keeping
• Subchapter S Corporations have limitations on ownership and structure
• C Corporations are subject to double taxation (profits are taxed at both the corporate and personal levels)

Limited Liability Company (LLC)

A Limited Liability Company (LLC) offers the liability protection of a corporation with the flexibility of a partnership or sole proprietorship. LLCs can avoid double taxation, similar to an S Corporation, without the same ownership restrictions. This entity structure is increasingly popular for small to medium-sized businesses.

Advantages of an LLC:

• Personal liability protection for members
• Variety of entities, including individuals and corporations, can be members
• Ownership interests are transferable
• Less paperwork than a corporation
• Pass-through taxation available

Disadvantages of an LLC:

• LLC members may be subject to self-employment taxes
• Transferring ownership interests can be more complex than in a corporation
• A tax accountant’s assistance is highly recommended to navigate potential tax issues

Choosing the Right Entity

Selecting the appropriate legal structure for your business requires a thorough understanding of the implications of each option. At Ferikes Bleynat & Cannon, our business attorneys will work with you to assess your specific goals and needs, guiding you through the process of forming your business entity. Whether you are starting a new venture or re-evaluating your current structure, we offer personalized legal advice to help you make the right decision.

Contact Us

For more information on how we can assist with your business formation or restructuring, contact the experienced attorneys at Ferikes Bleynat & Cannon. We are here to help you navigate the complexities of choosing the right business entity and ensure that your business is set up for long-term success.