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Choosing a business entity: Which one is best for you?

When starting a business, you make so many choices that determine its course. The type of entity you choose should reflect the type of business you want now and in the future. In order to choose a business structure that serves it best, you need to understand the major advantages and disadvantages of each.

Sole proprietorship

A sole proprietorship requires the least amount of legalities because it requires the least amount of effort to create and maintain, but it provides other advantages as well:

1. It requires no fees to set up.

2. You and the business function as the same entity in the eyes of the law.

3. You could deduct the business' losses on your personal income tax return.

As easy and "user friendly" as this entity might seem, downsides exist as well:

1. The IRS considers the profits from your business as personal income, which you must include in your tax returns.

2. You take personal responsibility for all of the liabilities of the business such as debts or legal judgments.

You might dismiss the disadvantages of this type of entity, but they require careful consideration.

General Partnership

Like a sole proprietorship, a general partnership requires less legality than other entities. The advantages and disadvantages of this entity mirror those of a sole proprietorship except that it involves more people. Each partner bears the responsibility for all of the company's liabilities.

Limited Partnership

In contrast, as the name implies, a limited partnership provides better protection from liabilities. Other advantages include the following:

1. Finding investors (limited partners) might come easier since this entity limits their liability to the amount of their investments.

2. As a general partner, you retain control over the operation of the business.

3. If a limited partner leaves, it does not affect the business.

On the downside, be aware of the following:

1. As a general partner, you remain personally responsible for all of the company's liabilities.

2. The cost of forming a limited partnership is higher than that of a general partnership.

3. This entity suits certain industries better than others do.

Other entity options might work better for your business, depending on the services or products you intend to provide.

Corporations

Numerous types of corporations exist. They offer protection from personal liability, but also require extensive paperwork and financial output to form. Maintaining a corporation requires a lot of work to maintain the protections and other advantages it provides. Other advantages and disadvantages depend on the corporate structure you choose.

Limited Liability Company (LLC)

A popular choice for many small businesses is the LLC. The only significant disadvantages concern formation cost and registration with the South Carolina Secretary of State. An LLC requires more paperwork. You might consider these disadvantages insignificant because you reap the following benefits:

1. You maintain significant control of the business.

2. You enjoy limited responsibility for the company's liabilities.

3. Ownership interest does not dictate percentage of the profits.

4. You choose whether the IRS assesses taxes on your LLC as a partnership or corporation.

Limited liability partnerships and professional limited liability companies provide the same advantages and disadvantages as an LLC, but they usually only apply to those in certain professions.

With everything you need to consider, it might help to discuss the matter with an attorney who can provide more detail regarding which entity will serve you best. In addition, he or she can assist you with the formation and maintenance of whatever entity you choose.

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