Positives and negatives of common business forms

Deciding on the best business form for a new business is an important foundation for whatever business endeavor the business owner is starting up.

Different options are available and deciding which one to choose depends on understanding the impact of the different business forms on:

• Personal liability protections
• Taxation
• Control of the business
• Management of the business
• Cost of running the business

The different business forms include:

• Sole proprietorship
• Partnership
• Corporation
• Limited liability company

Sole proprietorships offer a great amount of control over the business for the business owner but does not provide personal liability protection. In addition, sole proprietors are taxed on their personal income tax returns.

Partnerships are also taxed on the personal income tax returns of the partners. Partnerships typically are managed according to a partnership agreement. Partnerships also do not provide personal liability protection.

A corporation is a well-known business form that provides personal liability protection but can be costly to run and provide less control for business owners. In addition, corporations are sometimes considered double-taxed because shareholders and the corporate entity are taxed.

Limited liability companies also provide personal liability protection but allows the owners to decide if they prefer to be taxed as a corporation or partnership. There are many advantages, and some potential disadvantages, to the various business forms business owners should be familiar with.

Business law can help guide new business owners through the many decisions they need to make when starting a business and help provide a solid foundation for success.