If you're starting a business for the first time, one thing you'll need to decide on is the kind of business you want to run. Will you have a sole proprietorship? Do you want to open a corporation?
The kind of business you set up does matter. Certain business forms protect you against personal liability and can change the way that you do your taxes each year.
According to the Internal Revenue Service, the most common kinds of businesses include:
- Sole proprietorships
- Limited Liability Companies (LLCs)
Deciding on a business structure is the first step, because your choice will influence everything from your day-to-day operations to your taxes. You will want to choose the business structure that gives you the best balance of benefits and legal protections.
Sole proprietorships are an easy form for a business to take. You have complete control of your business and don't need to worry about creating a second business entity. Keep in mind that your business assets and personal liabilities are not separate, so your business could be on the hook for personal liability issues and vice versa.
You can get a trade name as a sole proprietor, but you won't be able to sell stock. This could make it more difficult to borrow from a bank.
Limited Liability Companies (LLCs)
Another option is the LLC. An LLC protects you against personal liability in most situations and will allow you to receive some of the benefits of corporations and partnership structures. If your LLC goes bankrupt or faces a lawsuit, your personal assets won't be at risk (in the majority of cases).
Of course, these are just two of the different business structures that are listed above. Each one has its own strengths and weaknesses, so you'll need to think carefully about the kind of business you want to run and if liability is a concern to you.
When you talk with your attorney, you'll want to have a good explanation of what you plan to do with your business and what kind of legal protections you'd like. You should discuss tax benefits of different types of business structures as well as ways to limit your personal liability in the case of problems that result in a lawsuit.
Your attorney will help you decide on the right business structure, so that you can start your business out on the right foot and build a strong business from the ground up.