Starting a business is personally rewarding, but there are many factors to consider. Selecting the appropriate business formation is just one consideration you will need to make, and this decision can affect you in a number of ways.
As stated by the U.S. Small Business Association, business formation can have legal and financial implications on you and your business. Here are two key questions to ask, so you can make an informed decision.
What is your personal liability?
Some business formations leave you, the business owner, liable for any losses experienced by customers and clients. Others safeguard you, meaning you are not personally liable should a loss occur.
If you decide to form as a limited liability company or corporation, losses involving the goods or services you provide to the public cannot put you at risk. If you form a limited partnership, you are only liable for the amount of money you have invested in your business. However, you will not be liable for any debt incurred by your partners. With conventional partnerships and sole proprietorships, you are liable for losses, and a person can sue you if a loss occurs.
How are business taxes affected?
Business formations also impact your tax obligations when doing business. As sole proprietor, you pay business taxes through your own personal tax forms. Conversely, if you choose an LLC or corporation, you must fill out a separate tax form on behalf of your business.
Choosing the most appropriate legal structure for your needs helps your business will succeed. It is just one of many important decisions business owners must make when getting started.