Of all the important decisions you need to make when starting a new business, the choice of business entity is one that carries a lot of weight and demands a considerable amount of thought. One reason this decision demands such careful planning is because there are so many available options, and they all have different benefits and drawbacks.
The following are the four general options available when choosing your business entity:
If you’re looking for a simple arrangement that involves no one but yourself, a sole proprietorship might be the way to go. With this entity, your business expenses will come directly from your personal funds. Although it may appear to simplify things in the short term, it can make your tax situation more complex. A lawsuit or any business-related financial trouble can thus have serious impact on your personal finances, as your funds are not separated.
A partnership brings with it the stability of having more people than just yourself involved in your startup, as well as the increased funding that your partners may provide. Determining roles and responsibilities can be complicated, however, and there’s still the challenge of keeping business and personal finances separated. A related option is a limited partnership, which involves the selling of limited partnership interest and has the advantage of providing additional funding without requiring too much involvement from your limited partners.
Limited liability company
The first major benefit of a limited liability company (LLC) is the separation of your personal and business finances. Managing an LLC can often be left to all of the members, but some LLCs choose to appoint a specific individual to the top management role—or even several individuals to fulfill specific roles, such as president, treasurer or any other traditional official role. It’s important to establish, in writing, the specific roles to be performed by the members of any LLC.
Forming a corporation is more expensive and carries considerably higher tax burdens than other types of business entities, but for startups in search of funding from venture capitalists, it may be a great option. Corporations also require more official structuring and the completion of a variety of legal and financial requirements. But once a business is able to incorporate, the status that comes along with it can offer numerous benefits.
These are just several of the options available, and other possible business entities could also be on the table for your startup. To find out more about your options and to discover what’s best for your situation, speak with an experienced business law attorney.
BoltNagi is a respected and established business and corporate law firm serving clients throughout the U.S. Virgin Islands.