What’s the best type of formation for your business?

If you’re starting a new business, you’ve probably realized that you have to become well-versed in an incredible number of subjects now that you may have no experience in. You’re starting your business because you have an excellent idea for a product or service, so when it comes to creating the legal structure that would define that business, there’s a lot to take in. Unfortunately, your business structure is not something you can delay until your business matures. Figuring out the right formation requires a certain amount of foresight and projections regarding what your company will look like in the months and years to come.

Considering all your options

Some of the primary considerations surrounding which formation to choose involve the amount of liability that you incur as the owner, the tax implications of your organization, as well as the ability to accept different forms of investment later on. The most common forms of business structure include:

  • Sole proprietorship: This structure is the simplest form that someone can operate as a business. The owner is responsible for debts incurred by the company and enjoys certain tax benefits depending on the type of company. Taxation is relatively simple in a sole proprietorship because the company assets commingle with the owner’s assets.
  • Limited liability company (LLC): This structure separates liability from the owners and allows for a more flexible management organization and more available tax deductions. Connecticut requires that an LLC have an agent to ‘accept service of process’ for the company for lawsuits. 
  • Corporation: A corporation is a limited liability partnership that is a separate entity from the people that own it. Shareholders are eligible to benefit from profits while not being personally liable for company debts. C corporation is sometimes more appealing to venture capital funds.
  • Nonprofit: These companies are not required to pay taxes on profits. Nonprofits can be formed like a corporation, with the associated liability shielding.
  • Partnership: This structure typically includes two or more people that you can rely on and trust to perform the management duties of your company. A partnership agreement usually consists of some split in the profits between you and the other partners. These are easier formations to set up, but the owners may be personally liable for company debts and their partner’s obligations.

Doing what’s right for your company

If you’re an entrepreneur looking to form a new business, it would help to contact an attorney with experience in business law and business formations to explore all the options for your company.