Starting a New Business Venture? Choose the Right Type of Business Entity

business entity types

5 min read

Challenging times are often seen as good times to start a business. The COVID-19 pandemic is a perfect example, as it brought many changes to our everyday lives, challenging entrepreneurs to think outside the box and meet new needs.

If you are thinking about new business opportunities or starting a new venture, be sure to take time and careful consideration when selecting your entity type. Most of the time, entrepreneurs get advice from someone who doesn’t ask all the right questions, and most importantly, doesn’t ask what the end game is for this new business venture. Therefore, the “cheapest” or “easiest” option may not be the best fit for you.

There are numerous issues to be considered, as we will discuss here.

What Are the Most Popular Business Entity Types?

There are 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, that often is not the case.

Choosing a Business Structure: 7 Key Questions to Ask Yourself

Many entrepreneurs do 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. This is why time and planning spent now will help for years to come.

Some of the most important questions to ask when deciding on the best business structure are:

  1. How many owners will there be?
    • Is it possible that you will admit more in the future?
    • If there is more than one owner, are any of them non-U.S. individuals or are they a business entity?
  2. What type of business do you plan on starting?
    • Is it capital intensive or a service business?
  3. Will this entity require debt to operate?
  4. Will you be directly involved in the company’s day-to-day running?
  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 or losses for a period of time?

Now, let’s 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 you since you are 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.

Need a Trusted Advisor to Help You Make These Decisions? MGA Is Here for You

Choosing an entity type for your new business should not be a casual decision. There are some critical questions to ask a trusted advisor before moving forward.

Of course, we could quickly provide you with a diagram of the differences between the various entity types. That is the easy way out, but not necessarily the right path to follow. Allowing a trusted advisor to walk you through the complex analysis and provide you with a simple and best answer is the attention this type of decision deserves.

Read More About How We Work With Like-Minded Entrepreneurs

Reach out to us and let us get you started on the path to finding the best type of business structure that will provide you the most flexibility for growth today and into the future.

We are here to make the complex simple.

Let's talk!

January 18, 2022