Quite frequently, clients ask me, “What type of entity should I be?” And my answer is always the same, “It depends.”
The type of entity that you choose to be affects each of these items:
- Ease of formation
- Taxation of income
- Tax filing requirements
- Administrative and legal costs
- Fringe benefits available to you
- Retirement plans available to you
- Legal liability protection
- Ease of selling all or a portion of an entity
And your choices are (I’ll cover each of these entity types in later posts):
- Sole Proprietorship
- Regular Corporation
- Sub-chapter S Corporation
- Limited Liability Company (which then brings you to choosing one of the above)
To be better able to make a decision as you explore the different entities, here are some questions to ponder:
- Is it just me or will others be involved in ownership of the business?
- If there are losses, do I want to be able to take them against other income that I have?
- Is the “cost” of set up crucial to me?
- Do I have the funds, and is it important to be able to put a large part of the profit into a retirement plan?
- What fringe benefits are important to me? Am I being covered under another health insurance policy?
- Will I have employees?
- How capable am I with paperwork, or will I be hiring expertise?
- Is passing the business on to future generations important to me?
- Do I have plans or dreams to sell the business?
- What are the possibilities of legal liability that can’t be covered by insurance?
The beginning is the time to clarify some of your intentions and choose the “right” entity. Entities can be changed, and sometimes need to be changed. But it’s so much smoother when you get it right the first time.