One of the first decisions that potential business owners must confront is how their business should be structured and operated. This crucial decision must be made even before the business has actually begun operations. The legal documents that will generally accompany the formation of a business can follow many different patterns, depending on the particular situation and the type of business to be undertaken.
Initially, the type of business entity to be used must be selected. There are many basic forms of business operating entities. The five most common forms are:
The choice of entity for a particular business depends on many factors. Which of these forms of business organization is chosen can have a great impact on the success of the business. The structure chosen will have an effect on how easy it is to obtain financing, how taxes are paid, how accounting records are kept, whether personal assets are at risk in the venture, the amount of control the “owner” has over the business, and many other aspects of the business. Keep in mind that the initial choice of business organization need not be the final choice. It is often wise to begin with the simplest form, the sole proprietorship, until the business progresses to a point where another form is clearly indicated. This allows the business to begin in the least complicated manner and allows the owner to retain total control in the important formative period of the business. As the business grows and the potential for liability and tax burdens increase, circumstances may dictate a re-examination of the business structure. The advantages and disadvantages of the five choices of business operation are detailed below.
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“Choosing a Business Entity” © Nova Publishing Company, 2005