Deciding On A Legal Entity For Your Business

Dear M & M: I don’t understand what legal entity I should make my business?  It seems I need to make this decision before I start, HELP! – Joan

Dear Joan:

You are correct determining what legal entity is right up there with choosing a business name as far as what are some of the first things a person does to start a business. First let’s describe what a legal entity is. According to the online web site the standard definition of a legal entity is: an association, corporation, partnership, proprietorship, trust, or individual that has legal standing in the eyes of the law.

A legal entity has the capacity to enter into agreements or contracts, assumes obligations, incur and pay debts, sue and be sued in its own right and be held responsible for its actions. Generally speaking there are five reasons one should choose what legal entity you should become. These five categories include, Cost to become and maintain, tax consequences, liability, flexibility and future needs.

The first category cost to become and maintain include considerations on the administration and record-keeping necessary to maintain. Explore options as they vary differently from one entity to the other. In addition, each entity has different advantages and disadvantages depending on the situate tax wise. It would be prudent to consult a CPA who is knowledgeable on how taxes affect different legal entities.

As far as protection or liability to a business or owner corporations can offer some protection. Don’t forget insurance can protect you in many ways too. Once again depending on the nature of the business and possibility of lawsuit various forms of legal entities offer different protection. Termination, continuation taking on more investors or owners each legal entity has pros and cons to it also.

Tine should be spent on determining which form of legal entity is right for you. I would get professional help from an attorney and a CPA to get some solid advice or assistance.



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