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Austin TX Business Law Blog

Thursday, February 25, 2021

What Type of Business Entity Should I Form?

Starting a business will involve many decisions. Perhaps one of the most important decisions among them will be how you will structure your company. The legal structure of a business will impact its very foundation, all the way up. It will impact how much is paid in taxes. It will impact personal liability. It will impact how to set up the business as well as how money can be raised for the business. An individual decision that will depend on the circumstances of every business owner, you should avoid approaching the choice is if one business structure is better than another. Each structure has its potential benefits and may be a good fit for a certain type of business owner.

What Type of Business Entity Should I Form?

The way you legally structure your business should hinge on what type of personal liability you are willing to be exposed to. It should also depend on how you want your business earnings to be treated for tax purposes. It should also depend on how you want business records kept. Here, we will go through some of the more popular business structures to give an overview of the variances between them.

First, there is the most commonly created type of business, which is a sole proprietorship. Most of what draws people to this business structure is the fact that it is very easy to form. Furthermore, it allows the business owner to have total managerial control over the business. The potential drawbacks of a sole proprietorship include the fact that the business owner will remain personally liable for all financial obligations incurred by the business.

There is also the option of forming a business as a partnership. In a partnership, two or more people reach an agreement on sharing both the profits and losses of a business. Much of what makes a partnership appealing is the fact that the partnership itself does not carry the tax burden associated with profits nor does it carry those associated with losses. Both profits and losses to the business are passed through to the business partners and they are responsible for reporting them on their individual tax returns. The potential drawbacks of a partnership, however, include the same as that of a sole proprietorship. This is the fact that each business partner can be held personally liable for the financial obligations incurred by the business.

Another popular business structure is the corporation which is, to put plainly, a legal entity established for the purpose of conducting business. A corporation remains an entity that is

separate from its founders. The corporation is taxed separately and the founders are shielded from personal liability. Many people shy away from the corporation structure, however, because it can be expensive to form and the record-keeping requirements are extensive.

A limited liability is a commonly used business structure because it has the advantages of both a corporation structure and a partnership. While profits and losses can pass through to the owners without taxation, the owners continue to enjoy being shielded from personal liability.

Business Law Attorney

How you structure your business is very important. Get trusted business counsel on this critical choice from The Kumar Law Firm. Contact us today.


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