Form An Entity To Protect Your Business

The business world is rife with risk. Lawsuits from competitors and customers are, unfortunately, on the rise. To protect yourself and your business, you need to take steps. This means forming a business entity.

In legal terms, the issue facing you is known as the decision to incorporate. This is a bit of an incorrect use of the word incorporate. While the corporate entity is common, there are plenty of others as well.

The truth of the matter is there are many different business forms you can choose from. A corporation is one of the oldest and most stable, but it is hardly the only one out there. Let's take a closer look at some of the more popular business entities.

What is the single most common business form in the world? It is the sole proprietor. This occurs when one person just starts doing business. It is highly flexible, but not great overall. You are personally exposed to liability and the tax situation is not great.

If two or more people pursue a business venture without forming an entity, they are automatically designated as a general partnership. General partnerships are horrific business entities because they expose the partners to all the debts of the partnership.

Although the partnership is often a default situation, it is form of business that can be elected. Why would someone form a partnership? Primarily for flexibility and tax purposes. There are no corporate formalities and taxes flow to the partners' returns.

The LLC is a very popular entity, but most people don't realize it has only existed for the last 30 years or so. The LLC is touted as the wonder business entity because it provides the tax aspect of a partnership and protection of a corporation.

The limited liability company was supposed to be the answer for small businesses. The flexibility and tax ease of a partnership with the ironclad liability protection of a corp. All this is true, but there are a lot of fees and taxes have been increased.

The corporation is our next subject of discussion. It is the oldest formal business entity. It provides ironclad liability protection when run correctly. This means people that invest in the entity are not personally responsible for its debts.

There are definitely cons to choosing a corporation for your business. It is a formal business and archaic rules must be followed. This often means retaining a business attorney to make sure you are incompliance, a costly requirement.

To determine the best choice for your business, it is worth slapping down a few dollars to talk with a CPA and attorney. General discussions about business entities are great and all, but you need advice about your specific situation.