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Why Business Formation Is Important

On Behalf of | May 1, 2016 | Business Law

Starting a new business can be an exciting process. When you are ready to do so, it is important that you choose the best legal entity structure within which your business will operate. Some people make the mistake of simply opening a business without taking the time to go through the business formation process. If you do so, you run the risk of exposing yourself to the potential reach of creditors. Each of the types of business structures provides different levels of protection, different tax impacts, and different reporting requirements.

The Different Types of Business Structures

Individual business owners who do not incorporate are operating as a sole proprietor in most cases. Sole proprietors report the income they make from their business on their individual income tax returns. Unlike other business structures, sole proprietorships do not afford protection from liability. Other business structures include limited liability companies (“LLCs”), S-corporations, C-corporations, nonprofits, and limited liability partnerships (“LLPs”). While not an exhaustive list, these are the most common structures chosen by people who are opening businesses. Each one of these structures provides some liability protection to the entrepreneurs who own them. Each structure also has varying tax and reporting requirements. Part of the job of a business formation lawyer is to advise clients regarding the structure that is most appropriate for their business needs.

Liability Protection Considerations

With a sole proprietorship, a business owner’s personal assets may be at risk from creditors of their business. The other structures protect a person’s personal assets, placing them beyond the reach of lawsuits and business creditors. Having protection from liability is one of the most important factors entrepreneurs should consider when opening new businesses.

Other Considerations

Some structures require periodic reporting. Others require the formation of a board, written minutes and significant documentation. Each has its own tax consequences. An attorney may be able to help their clients with choosing the most appropriate structure for their business type.

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