Posted by Jim McClaflin, EA, NTPI Fellow

Things to Consider When Choosing a Business Entity

Things to Consider When Choosing a Business Entity

Description: choosing a business entity can be tough. Make sure to consider these topics to make the right choice for you!

Choosing a business entity is really important to the structure, legal responsibility, and the everyday running of your business. But deciding which business entity is the right one for you can be challenging. You may like the idea of setting up a business on your own and running it without having to listen to the say of others who run the business as well, but the legal implications can have you running the other way. When you are choosing a business entity, make sure to contact the professionals at Accounting and Tax Professionals to help you make the right decision. We can look at some of the considerations listed below to help you understand what each business entity means and how it can benefit your business.

Legal Obligations

The first question you will need to ask yourself is how protected you wish to be from legal liability. You should look at your business and see how much liability it could potentially have. An independent doctor is more likely to have liability brought against them compared to a freelance writer. If you are worried about this liability in your business, it is a good idea to consider incorporating your business. If a lawsuit is brought against, you, the judgment will be against the business and it isn’t possible for them to come after personal assets.

When you are a sole proprietorship or a partnership, it is more likely that you will have to guard your personal assets in other ways if a lawsuit is brought against you. But, there is a lot more freedom in owning the business on your own without shareholders and all the paperwork. If you are a small business, it is still better to go with these other options rather than a corporation and find other ways to protect your personal assets.

Tax Implications

Usually there are a number of tax options that corporations can claim compared to partnerships and proprietorships. For example, when you are incorporated, there can be the issue of double taxation, but if you change into an S corporation, this can be avoided. In fact, you can become an S corporation even if you have fewer than 70 shareholders and when you have business losses, you can reduce your personal liability with taxes. To find out the different tax implications for each type of entity, meet with one of the professionals at Accounting and Tax Professionals to compare your options.

Cost to Form 

While choosing to become a corporation can save you during tax season, often the costs to form and maintain a corporation can take away from the benefits. There is a lot of costs with paperwork and record keeping and many smaller businesses may choose to be a partnership or run the business on their own. If you own a large business, this might be a good option, but for smaller businesses run by just a few people, choosing corporation status just doesn’t make that much sense.

Proprietorships and partnerships often cost little to form. They may cost a bit more at tax season, but the record keeping will not take as much time and most business owners are able to do it on their own. This can save a lot of costs through the year and unless your business is pretty large, it makes more sense to stick with these options.

Flexibility

You want to make sure you have as much flexibility as possible for your business based on the needs of the owners and of the business. Each business is going to be a little different; what works well for one business is not going to make any sense for another. You need to look at your personal goals and where you would like to see the business in the future to help determine which business entity is best for you.

Future needs

At the beginning of your business, there are a lot of things to consider. You want to get the business off the ground and you may not think ahead to what your business is going to look like in ten years. While this is important to keeping track of everything and helping your business succeed, you do need to take some time to figure out the best type of business entity for your business not only now, but in the future. At accounting and Tax Professionals can help you to determine the future needs of your business so you can make the right decisions from the beginning.

First, you need to consider what you would like to happen to the business when you pass on. If you want the business to continue on and would like a clear direction for the growing business, a corporation may be the best bet for you. If you choose a partnership or proprietorship, the business is likely to dissolve when the owner dies, unless a family member is looking to pick it up. On the other hand, a corporation can be handed over to family members who can continue on with the business.

You must also consider that the structure of your business can change through the years. Something that starts out as a sole proprietorship can evolve to be some other business structure through the years. Routinely look at your business and determine the business entity that is best for you.

When you are starting a new business and need help with creating your business entity or even with the accounting, make sure to contact Jim McClaflin at Accounting and Tax Professionals in Grimes, IA. We have the experience to help you with all your tax and accounting needs, no matter how big or small. Contact us today to get started.

Jim McClaflin, EA, NTPI Fellow
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