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The most boring, but critical, business formation decision

More than likely, there are any number of things you would rather be doing while you get ready to open your new company than deciding what type of business entity you should form. This probably represents one of the more boring decisions you must make during the formation process.

However, it could also stand as one of the most critical. The entity type you choose will dictate how much personal liability you have to the company and determine how the IRS views your business for taxation purposes. The type of entity will also determine how much paperwork you will need to handle, dictate how much structure you require and reflect your long-term goals.

Business entity types

You may choose among several different types of entities when forming your business. The most popular are listed below:

  • A limited liability company limits your personal liability while providing you with a more relaxed business structure. This could explain why it is a popular choice.
  • A corporation limits personal liability as well, but has more structure and paperwork requirements. You may choose to form an S corporation, which is not quite as formal as a regular corporation.
  • A partnership is unincorporated, and the partners split the profits and taxes on their personal returns. You may form a limited liability partnership, limited partnership or general partnership, among others.
  • A sole proprietorship comes with the least amount of paperwork and government oversight, but you take on all of the liability for the business.

It may seem as though this would be an easy decision based on the above information, but there is more to each entity type than outlined in this limited forum. Your decision will more than likely include numerous business and legal considerations. You may want to determine exactly what the paperwork requirements are for each entity, along with how you would interact with your business partners, if any.

Even though some entities do not require as much paperwork, you may still want to enter into a formal agreement with the other members of your venture in order to protect your rights and the company. In addition, each entity could have ramifications on the future of the business. In order to make the best decision possible under the circumstances, you may want to conduct further research, which would probably include making use of the legal resources available in your part of Utah.

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