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 is a pass-through entity for tax purposes. That means that, with certain exceptions, income taxes are not paid by the entity, but its individual owners pay taxes on their portion of the net income of the company. Because the LLC does not pay tax, there is only one level of taxation on the income of a limited liability company. 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 entity that is separate from the people that own it. Shareholders are eligible to benefit from profits while not being personally liable for company debts. A corporation may elect to be an S. Corporation or a C Corporation. An S Corporation is taxed much like a limited liability company. However, a C corporation pays tax on any income that it receives. If it distributes its profits after taxes to its shareholders in the form of a dividend, the shareholders pay taxes on that dividend. A C corporation is sometimes more appealing to venture capital funds or other entities that might be interested in providing funding to the enterprise.
  • Nonprofit: These companies are not intended to be operated for a profit. One might be a charity, or it might be a private club. Nonprofits can be formed like a corporation, with the associated liability shielding.,
  • Partnership: This structure typically includes two or more people who rely on and trust one another to perform the management duties of their company properly. 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 liabilities of their partners that are incurred in operating the business.

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.