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Choosing the Right Business Entity

Joe Vincent
July 28, 2023

Business owners have numerous choices when it comes to selecting their legal and tax entity structures. Trying to decide between structures, such as LLCs, C corporations, S corporations, partnerships or sole proprietorship can get confusing. And even more important, a business entity choice made a few years ago might not be the best choice today.

Business owners must carefully consider their legal and tax entity structures as they have a significant impact on the company’s operations, financials, and legal liabilities. It is essential to periodically review and reassess these structures to ensure they align with the changing needs and goals of the business. Let’s delve deeper into the reasons behind each point:

Types of Business Structures

Limiting Legal Liability. Choosing the right business entity structure can protect personal assets from potential lawsuits and creditors. For example, if a business operates as a sole proprietorship, the owner’s personal assets (such as their home, car, and savings) are vulnerable to business-related legal claims. However, forming an LLC or corporation creates a separate legal entity, shielding the owner’s personal assets from business liabilities. This limited liability feature is particularly beneficial in industries prone to lawsuits or those with inherent risks.
Hiring Employees. When a business starts expanding and hiring employees, it becomes more exposed to potential legal claims arising from employees’ actions. In such cases, incorporating the business offers protection to the owner’s personal assets. If an employee’s actions result in a lawsuit against the company, having limited liability ensures that personal assets are not at risk to cover the business’s liabilities. This added protection provides peace of mind to business owners as they grow their workforce.
Establishing Credibility. The choice of business entity can impact the perception of the company’s credibility by customers, suppliers, and partners. Adding “LLC” (Limited Liability Company) or “Inc.” (Incorporated) to the business name signals professionalism, stability, and a commitment to legal compliance. This can lead to increased trust and confidence from clients and partners, potentially resulting in more business opportunities and partnerships.
Accessing Credit and Capital. Incorporating the business can improve its ability to secure financing from banks and attract investments from external sources. Financial institutions prefer working with incorporated businesses as they are considered more stable and legitimate than unincorporated entities. Investors are also more likely to invest in corporations or LLCs, which offer limited liability protection and clear ownership structures.
Avoiding Double Taxation. Double taxation can be a significant concern for C corporations. However, with changes in tax laws and rates, the best entity choice might not be as clear-cut. Evaluating your business’s specific financials and long-term goals is essential.
Seek Professional Advice. Switching business entities is not a decision to be taken lightly. It can have legal and tax consequences, and it’s crucial to seek advice from legal and financial professionals before making any changes. They can help you understand the implications, guide you through the process, and ensure compliance with all necessary requirements.

Remember, the right business entity can set the foundation for your company’s long-term success, so make an informed decision today and secure a prosperous future for your business. Don’t hesitate to contact us today to assist you in reviewing your business structure, assessing potential tax planning opportunities, and identifying the best entity that suits your needs.

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