Starting your own business offers a unique brand of freedom and professional fulfillment. There’s nothing quite like taking an inspired idea and transforming it—through immense hard work, dedication, and time—into a successful business.
Getting from an idea to a business, however, can be complicated and filled with opportunities for costly mistakes. Many aspiring entrepreneurs never make past the initial idea because they are tripped up by mistakes in the initial stages of their business.
One of the first critical choices a future business owner must make is the type of entity for the business. The type of business entity chosen will have lasting implications—tax, legal, and otherwise.
If you are thinking of starting a business, make sure to carefully consider your business entity. It’s easy to move forward in your excitement without fully weighing your options, but remember that this can have unforeseen consequences.
When building your business, there are a number of entities from which to choose, including the following:
Sole Proprietorship: This is a business run by one person. This type is easy to form and gives the owner complete control. However, the downside is that the owner is personally liable for the business’s financial obligations.
Partnership: This is a business run by at least two people. These people share the business’s profits and losses. The partners, not the partnership, are responsible for reporting income and losses on their individual tax returns. The downside to this type of business is that the partners are legally liable for the financial obligations of the partnership.
Corporation: This is an entity formed to conduct business. The corporation is taxed and is legally liable for its financial obligations and actions; the founders are not personally liable. However, corporations do have disadvantages: forming a corporation is more costly, and record-keeping is required in order to maintain it.
Limited Liability Company (LLC): This type of business entity is similar to a partnership in that the partners report profits and losses on their individual tax returns, and the business is not taxed. However, unlike a partnership, the partners are not personally liable.
When choosing a business entity, you should consider your legal liability, the tax consequences, the cost of formation, flexibility, and your future needs.
If you need guidance determining your business’s entity, call the experienced business lawyers at Hunsaker | Emmi, P.C. in Golden, Colorado.