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How to Choose the Best Business Entity for Your Startup?

What are the most common types of business entities

How to Choose the Best Business Entity for Your Startup?

Choosing a business entity for your startup is an important step in the process of launching a startup, whether it’s a full-time commitment or a part-time engagement. It’s important to be cautious and weigh your options carefully before reaching a decision. If you are uncertain about the implications of this choice, you always have business incorporation services available across San Diego and San Diego County to fall back on.

Check out the following tips to help you land on an entity type that best matches your startup vision!

What are the most common types of business entities?

There are compelling arguments in favor of making your startup idea come to life. But if you are new to startups, there is much to learn about what incorporating a startup entails before you actually register your business.

It is important to understand that your choice of startup structure has a direct impact on everything from your day-to-day operations to the potential risks to your personal assets. You have several options at your disposal, depending on who controls your business and how you want to run it, how you want your business to be taxed, how you want to pay yourself, what potential business liability and bookkeeping requirements you are willing to accept, and more. The right business structure will enable you to balance your legal protections and benefits.

There are 5 main types of business entities:

  • Sole proprietorship
  • Partnership
  • C corporation (C-corp)
  • S corporation (S-corp)
  • Limited liability company (LLC)

What form of business organization is the best for a start up business?

The legal structure of a business can have an impact on its success. Key selection criteria include:

  • Flexibility
  • Complexity
  • Liability
  • Taxes
  • Control
  • Capital investment
  • Licenses, permits and regulations

Each of the available structures has pros and cons:

Sole proprietorship

Key benefits:

  • Easy setup
  • Low cost
  • Tax deduction
  • Easy exit

You are the sole owner and operator of your business. Expenses and incomes are factored into your personal income tax return. Earnings are taxed only once a year, but personal assets are not protected from liability in case of debt or legal issues. Securing a bank loan may be more difficult.

Partnership

Key benefits:

  • Easy to form
  • Growth potential
  • Special taxation

You share responsibilities and liabilities with a partner or partners. All partners take active part in a general partnership and share personal liability for any obligations or debts, while partners in a limited partnership may assume solely the role of investors. This structure is characterized by a higher degree of complexity and requires a greater financial commitment than some of the other options.

Corporations

Key benefits:

  • Limited liability
  • Continuity
  • Capital available from multiple investors
C corporation (C-corp)

This entity is independent from its owners and operators. Although more demanding tax requirements and other regulations apply, this structure provides protection of your personal assets from liability. Founders can raise funding by selling stock. Set-up may require assistance from a legal professional.

S corporation (S-corp)

This type of entity offers liability protection and tax benefits. Income and losses are passed to the shareholders so only one level of federal taxes applies. In terms of operation, strict rules apply. Limitations exist in terms of stock ownership eligibility.

Limited liability company (LLC)

Key benefits:

  • Limited personal liabilities
  • Tax and flexibility benefits

This hybrid structure functions much like an S-corp, but without restricting the number of shareholders. Each shareholder can take active part in company operations. Personal assets are protected from liability. Company may need to be dissolved after a certain period of time.

Specific financial considerations

Your safest bet is to base your entity selection on your specific circumstances and your current cash flow:

  • Forming a C corporation is a favorable solution when you are a founder turning to a venture investor among outside institutional investors.
  • An S-corp or an LLC may be a good starting point when you are mainly relying on friends, family or other individuals for finances. However, this decision can have adverse tax consequences and carry other repercussions if you decide to raise venture capital in the future and need to change your status accordingly.
  • If you are currently strapped for cash, an LLC may be your safest choice, as it allows you to delay the costs until you find institutional investors. However, the costs of forming an LLC will not necessarily be lower than the initial costs of setting up a corporation, such as if the company has multiple members.
  • If you have the finances to absorb costs right now, consider forming an S-corporation. The key advantage of S-corps concerns taxation as a passed-through entity. Your S-corp can easily be converted into a C-corp for taxation purposes once you take on investors.

Furthermore, your company is susceptible to changes as it grows. For instance, you can have your S corp election revoked if the corresponding requirements are no longer met, and your company will be designated as a C corporation from that point on.

Can you combine different business structures within a single business?

Yes. For instance, your company can have the status of an S corp although it is designated as an LLC. However, setting up such non-standard arrangements is uncommon and can be somewhat complex, which is why you should contact a business counselor to discuss your options at length.

Book savvy business incorporation services in San Diego

What form of business organization is the best for a start up business

Choosing the legal structure for your promising startup in Harborview is an important technicality. The good news is that we specialize in handling technicalities and paperwork for San Diego businesses. We can be the one-stop shop for your business, and we handle everything from business incorporation to payroll, bookkeeping and tax preparation. We will provide you with a fail-safe guideline to follow. For more details on our comprehensive solutions, contact us today!