Choosing an Entity Type

Key Considerations

• What is your starting point?: What are you “selling”?  Do you currently have employees?  How big is your business? When you need money, where is it coming from?
• Where are you going? What is your vision and what are your goals to attain that vision? How big do you see your business becoming and how quickly do you want to get there?
• What will you need? Now that you know where you’re going, how will you get there? How much funding will you require? Where and from whom will you get it? Do you want to become a public company and issue shares or would you prefer to stay private?  Will you require a significant and diverse ownership base to raise the capital you will require?
• What are the risks? How much risk is there in the business? Do you seek to limit your personal liability and have a hard line between your personal and business assets? How hard do you want that line to be?
• How long will it last? Do you see your business ending with you or do you hope to create a lasting entity that can be passed on to family or sold to another owner?

Still not sure?  Consider the typical owner profiles for each business structure:

Sole Proprietorship is for owners wanting… the status quo.   They are comfortable exposing their personal assets to their business liabilities.  They envision a small or declining operation that starts and ends with him or herself.   They seek to own and control 100% of the business.  They don’t envision needing any significant amount of financing.

Partnership is for owners wanting… to share ownership with others, but still view the business like the sole proprietor in regards to personal liability protection.    

C-Corporations are for owners wanting… the most independent and separate business entity (for personal asset protection), the least restrictions on transfer, and the greatest ability to raise capital.    They desire significant growth and the option to easily exit and sell the business.  They’re comfortable with the formalities required of a Corporation.

S-Corporation is for owners wanting… the formalization and identity of a Corporation, but desire the tax flexibility of an LLC (pass through to individual returns).  They are also comfortable with some limitations on ownership – the number and mix of owners – and any implications that may have on growth. 

Limited Liability Company is for owners wanting… a separate business entity for the liability protection, with the flexibility on ownership of C-Corporations, but with fewer formalities.    They also want the choice between pass-through and corporate taxation, as well as the ability to allocate profits and losses in proportions different from ownership interests.