It’s a new year with a new set of resolutions. Which will you conquer first? One of the first things to cross off your list when starting a new business is selecting your entity type. Do you want an S-corp, C-corp, LLC, GP, LP, LLP, LLLP, Sole Proprietorship? Should your LLC elect to be treated as an S-corp or a C-corp? Does it really make a difference?
Of course there are different legal ramifications for each entity type, which should be discussed with an attorney, but there are different tax ramifications as well. It is possible to change entity type down the road, but it may be costly to do so. Here is a short, non-inclusive list of items to consider.
- How will you capitalize the business? In other words, how are you getting money? Will you contribute your own outside assets? Will you bring in outside investors? IPO?
- How will profits/losses/distributions amongst owners be handled? Based on ownership or will there be a preferential return for certain investors/owners?
- What are your plans for future disposition of the business? In other words, what’s your end game?
- What is your business type? What kind of assets does your business own?
- Will the business be making distributions to the owners?
- How will owners be compensated for services provided to the business? (Also, owners may be treated differently than other employees in terms of compensation and benefits.)
- Is it beneficial to use the business losses on the owners’ personal tax returns?
- In what state(s) do you operate?
- What are current and expected tax rates?
- What are the complexities and administrative requirements?
As you can see from the list above, this is not an easy process. In fact, it’s complex and has several facets to consider before you make the decision. So don’t jump at the first entity type that catches your eye. Instead, take time to look and see what’s the best match for where you want to go with your business.