Choice of Business Entity

New business ventures should carefully consider the type of entity under which they will operate. Choices include sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company taxed as a partnership, limited liability corporation taxed as a corporation, limited liability corporation taxed as a disregarded entity, regular corporation, S corporation, professional corporation, qualified subchapter S trust, and business trust. Properly structured, new business ventures can be funded by contributions of appreciated property without tax to the contributing owner.

Among the factors that dictate the choice of entity are owners' desires, need for liability protection for one or all of the owners, state law considerations, geographical extent of operations, number and type of owners, need for multiple classes of owners, owners' tax basis in their ownership interests, degree of owners' active participation in the business, contributions of property and services in exchange for ownership interests, ease and cost of formation, sources of capital, character and timing of income to the entity, character and rate of entity-level taxation, character and timing of income to owners, owners, character and timing of owners' income from other sources, fiscal vs. calendar year, desired method of accounting, anticipated future growth, ease and cost of conversion to another type of entity, and an exit strategy.

These are very impressive lists for what most business owners think is a very straightforward decision. We assist our clients in choosing the alternative that best meets their current and future needs. In many cases, we can help our clients change their current form of business entity to meet unanticipated new or future requirements.

©2008 Ronnie C. McClure, PhD, CPA