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How to Choose the Best Type of Business Entity for Your Startup

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So, you are starting a new business and are simply not sure what type of business entity to select. This question is a frequent concern for entrepreneurs. Many new business owners struggle with choosing the right format. The majority of the time they get advice from someone that doesn’t ask all the right questions and most importantly doesn’t ask what the end game is for this new business venture. 

There are so many types of business entities to choose from — LLCs, LLPs, LLLPs, limited partnerships, general partnerships, S corporations, C corporations, and a few others.

Yet, the menu choice for the closely held operating business often comes down to an LLC or an S corporation. While one would think that narrowing the choices to two makes the entity choice decision an easy one, it often is not the case. As will be discussed, there are numerous issues to be considered. 

Key Questions to Consider When Choosing a Type of Business Format

Many clients would not want to spend much money on the entity choice decision. However, if asked, they would certainly want to minimize their tax payments and maximize their deductions, not unlike persons who are investing money with a few more zeroes.

Some of the essential questions to ask when deciding on the best business structure involve the following:

  1. How many owners will there be?
    1. Is it possible that you will admit more in the future?
    2. If there is more than one owner is any of them non-US residents?
  2. What type of business do you plan on starting?
    1. Is it capital intensive or a service business?
  3. Will this entity require debt to operate?
  4. Will you be directly involved in the day to day running of the company?
  5. Do you plan to sell this business at some point?
  6. Will this business have foreign operations or subsidiaries?
  7. Does this business expect to have taxable income losses for a period of time?

Let’s now assume that a few of the questions lead us toward one type of entity over another. Another significant issue often overlooked is who should own this business. The obvious answer would be “me,” I’m the one creating this business. However, one should evaluate the estate tax and liability protection planning that is available as well.

During this evaluation period, a knowledgeable and forward-thinking advisor might discuss utilizing a Trust for your benefit as the owner of this business. If multiple family members are involved in this business, you should evaluate a family limited partnership as the owner of this new business entity.

Is It Time for You to Choose a Trusted Financial Advisor?

The key to this decision about what type of business entity you should select is that there are some critical questions to ask a trusted advisor. Decisions like these should not be casual.

Of course, we could quickly provide you with a diagram of the differences between various entity types. That is the easy way out, but not necessarily the right path to follow. We want to be the advisor that helps you through the complex analysis and provides you with a simple and best answer. Choosing the best type of business entity for your startup is a question that deserves that type of attention.

Advisory & Consulting Services

Contact your team at MGA and let us get you started on the path to finding the best type of business corporation that will provide you the most flexibility for growth today and into the future.

We work side by side with you, focusing on your specific problems to solve.

March 5, 2018