Which Entity Formation Should My Business Incorporate As?

What does it mean to incorporate a small business? Incorporation is the process of creating a corporate business structure. This structure allows the business to act as a separate legal entity from its owner. The entity formation you choose to incorporate as impacts every aspect of your small business; from personal liabilities the company faces to how much you pay in taxes.

Not sure where to begin? Consider incorporating as one of the following popular entity formations.

Sole Proprietorship

Most startups begin as a sole proprietorship. It is also known as the default entity formation.

Sole proprietorships enable the owner of the business to have full control of the company. They may act as the boss. They take responsibility for everything which occurs within the business. However, it can sometimes be difficult to manage running a business in this fashion. What if a customer accidentally injures themselves at your storefront? Or the company accrues too much debt and is unable to pay it off? A sole proprietor would be held fully responsible for these liabilities.

Despite the relative ease of forming a sole proprietorship, it may be beneficial to consider incorporating under an entity which provides limited liability protection. These entities, including LLCs, not only provide entrepreneurs with liability protection to protect their personal assets. They also provide tax benefits, which can create even more peace of mind for small business owners.  

Limited Liability Company (LLC)

A limited liability company (LLC) is a popular entity formation with small business owners. Many entrepreneurs incorporate as an LLC for a few reasons.

• Flexibility. LLCs have fewer compliance requirements, such as taking annual meetings or minutes.
• Tax benefits. LLCs are taxed as a default pass-through entity. The profits of the business pass through to the owners and allows the company to avoid double taxation.
• Choice of LLC structure. An LLC may be run by one owner, or member, as a single member LLC. It may choose an LLC structure which best suits its needs. For example, you may choose a member managed LLC if there are multiple members of the LLC or a manager managed LLC with a board of managers which assist with running the LLC.

Remember to draft a written operating agreement if you decide to incorporate as an LLC. This document details the rules and regulations for running and operating the LLC.

Corporation

Corporations are often a good fit for businesses which are quickly expanding. These companies may wish to expand to have a global presence or would like to take their businesses public with an IPO. Forming a corporation also means you can issue shares of stock to the shareholders, or owners, of the business.

However, corporations are a much more structured entity than LLCs. Meeting certain requirements helps keep the business in compliance. For example, you must appoint a board of directors and take thorough minutes during meetings. Corporations must also follow a set of corporate bylaws. These are the rules and regulations for how to run the corporation.

General Partnership

Have you thought about going into business with a friend or family member? Consider forming a general partnership.

A general partnership is the most common type of partnership. It allows two or more partners to establish an agreement so they can run the company. The partners can equally divide profits, liabilities, and management duties together.

Once you determine you would like to form a general partnership, draft a written partnership agreement. This document outlines the terms and clauses for how the business is run by its partners.

Nonprofit Corporation

Are you passionate about pursuing a social cause? You may decide to incorporate as a nonprofit corporation. This is an entity which allows a business to provide public benefit. Some examples of causes include advancing environmental goals, addressing social issues, doing charitable work, and aiding in disease prevention.

How does a nonprofit corporation differ from a corporation? Most corporations are for-profit organizations. A nonprofit corporation is for a charitable purpose. The revenue earned by a nonprofit will go towards achieving its mission instead of the business owners.

Like other legal entity formations, nonprofit corporations also provide liability protection to their officers and directors. A nonprofit corporation must establish its mission. The nonprofit must be organized for an exempt purpose, allowing it to file for tax exempt status.

Which Entity is Best for My Business?

These are just a few business entities you may decide to incorporate your business as. Every startup is different and has specific needs. If you have questions about whether you should incorporate as one of these entities, reach out to a legal professional. They can provide guidance as to which entity is best for your business and answer any additional questions you may have about the incorporation process.

Incorporate your small business with MyCorporation. Contact MyCorporation at mycorporation.com or give us a call at 877-692-6772.