You know of the five basic business structures, so you may think you know a lot about entity selection and structure; well, let’s make sure. After all, the most important decision you will make revolves around taxes, and this starts with entity selection and structure. Here are five things that everyone should know.

  • Cost of formation and administration: In the beginning, cost seems like a lot. Forming and running the administrative aspects of any type of business requires different tasks, and each one of those comes with a cost — both in terms of running it and in terms of cash. Sole proprietors have little formative paperwork, but they have a higher personal liability. Corporations, on the other side of the spectrum, cost a bit more to set up and keep the administration running, but it often is worth it for the extra layer of personal protection.
  • Legal liabilities: Step back for a second and consider what sort of liabilities your business my have. If it lends itself to potential liability that you can’t afford to take a personal risk on, you’ll need to take that into consideration. If you lean toward being able to take more personal risk, look at a sole proprietor. If not, then look at something structured more like a corporation. Incorporating your business is the only solid way to protect personal assets from business liabilities.
  • Tax implications: The way you structure your entity will reflect how taxes are applied to you or not. There are many more tax opportunities with a corporation, but a common disadvantage is double taxation. Whereas an S-corporation is particularly good for a company’s formative years because a business loss may help reduce a personal tax liability.
  • Flexibility: No two businesses are the same, and no business owners’ or administrators’ needs are the same. This has to be taken into account when deciding on what sort of structure to adhere to for your entity. Taking into account personal needs and affording the flexibility to grow is crucial at this step.
  • Future: Finally, think of the future. Don’t get so caught up in the now that you don’t think about what you’d like the future to be like in 3, 5, or even 10 years. And finally, don’t forget about what will happen to the company after you pass beyond your means of running it. Will you pass it on to your children? Will it be run by managers? Or will it simply fade away?

All of these aspects are important to think about when selecting your entity structure. They can prepare you for the best of times, the worst of times, and even the future beyond your control.

Here’s a very helpful Business Entity Comparison Chart to get you started. And if you’d like to talk to someone about any entity selection and structure, or anything else related, just contact Vizcaino Gitlin & Zomerfeld – contact here.