Why Your Small Business Needs a Business Entity

If you are an aspiring small business owner and are serious about doing things the right way, choose a business structure before you sell your first product, service your first client, or generate a single dime. Picking the right way to legally form your company can save plenty of headaches later as your empire grows.

You have probably heard terms like LLCs, partnerships, and corporations. These are simply different frameworks that legally govern and organize your business finances, ownership, operations, and liabilities. Depending on factors like number of owners and a desire for personal liability protection, you and your accountant can pick the structure best suited for your business.

A quick look at the options

• Sole Proprietorship: As a one-person show, you report income and losses on your personal tax return. It is simple, but offers no personal protection if the business is sued.
• Partnership: If you have multiple owners, this allows you to share control and combine skills and resources. All owners share liability risks and debts.
• Limited Liability Company (LLC): An LLC gives owners liability protection along with flexible tax and management options. It has become a popular choice for small businesses.
• Corporation: Forming a corporation creates a separate legal entity that shields personal assets if the business goes south, but brings more paperwork and formalities.

Before formally establishing your business structure, talk with legal and accounting professionals. They can explain the pros, cons, legal protections, and tax implications based on your goals and risk tolerance. Laying the right foundation now makes room for happier days ahead as your business grows.