Business Law: Why Choice of Entity is a Crucial First Decision

 Posted on January 29, 2016 in Small Business Taxes

When starting a new business, it is critical to understand the differences between different types of business structures and to evaluate the pros and cons of each option as they relate to your new venture. Business laws govern both the formation and operation of all types of business, and contain very specific requirements that can be traps for the unwary.

What might be an appropriate choice of entity for one type of business may not meet the needs of another. Unfortunately, making an incorrect choice of business entity not only creates administrative burdens to "unwind" the first choice, but it also usually results in unnecessary expenses at a time when the new business needs every dollar working for it.

There are also differences in the type of supporting documents a business must have behind the scenes, and in the legal formalities that must be observed on an ongoing basis. For example, a single-member LLC usually does not need to observe the same types of formalities as a corporate entity, which must hold and document regular meetings of shareholders and directors. Where a single-member LLC may not need an operating agreement or a member control agreement, those types of documents are very important for a multi-member LLC.

The choice of entity also affects how business income is taxed; making a choice without fully understanding its implications can be costly and may have long-lasting implications.

Discussing your proposed business, including your capital, product or service, growth goals and more with a business formation lawyer is one of the smartest and most important choices you can make as you embark on the path of entrepreneurship.

Contact us so we can help you take the right first steps.