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Business owners: 3 questions to help choose the right legal entity

On Behalf of | Apr 11, 2022 | Business Litigation

2022 may offer a beneficial marketplace for small businesses. An August 2021 survey conducted by NerdWallet found that 40% of Americans were trying to shop small and support local businesses as pandemic restrictions ease.

Those looking to take advantage of this trend can benefit from finding the right legal entity to take their business plans and make them into a reality. Taking some time to consider the following questions can help entrepreneurs to find the right fit for their business model.

#1: How much control do I want?

Business owners who want to retain full control of their enterprise are generally best suited to a sole proprietorship or limited liability company (LLC). The sole proprietorship is the simplest legal structure to create and has the least paperwork. One person, the owner, is responsible for the company’s direction, profits, and debts. The United States Small Business Administration (SBA) notes that this option is often best for business owners who wish to test out a low-risk idea.

The LLC offers similar benefits to a sole proprietorship when it comes to the question of control while a corporation is often subject to the wishes of a board of directors.

#2: Do I want liability protection?

Liability protection helps the business owner keep their personal assets separate from the business. This provides protection from creditors in the event of an issue. There is no liability protection for a sole proprietorship. The personal and business assets are basically mixed together, and creditors can go after both.

The other entities, like an LLC or corporation, offer liability protection.

#3: What about taxes?

A sole proprietorship or LLC use relatively easy tax rules. Taxes for both generally go through the owner’s personal tax returns while the Internal Revenue Service (IRS) views a corporation as its own entity. As such, the IRS taxes corporations separately.

Although these questions help begin the conversation, additional considerations like the need to earn capital and investment funds are important. An attorney experienced in these matters can help guide these conversations and better ensure you consider all risks and benefits before making your entity selection.