Right after you choose a company name, you need to choose what type of entity your business should become—i.e., its organizational structure.
Think of the entity as the type of boat you are going to sail on the sea of entrepreneurship—you might choose a tiny sailboat (the sole proprietorship), a yacht (the LLC), or a giant freighter (the C Corp). What you choose will depend on how much protection you need, and where you expect to end up.
Here are three questions to ask yourself:
What is your long-term vision?
Where do you see your business in one year, three years, 20 years? If you are going to seek investors, you will probably need to form a corporation. If you are content working as a freelancer, a sole proprietorship might suit you.
Is there liability involved?
What is the likelihood that your business will get sued? If you have personal assets, i.e., a hefty savings account and a house, you may want to form a corporation which protects shareholder's assets—and yours—in the event of a lawsuit.
An LLC, or limited liability company, also provides liability protection to the owners of the business. A substantial difference between corporations and LLCs is how they are taxed, so be sure to discuss which structure would be best with your tax professional.
Am I willing to pay now?
Each entity type has its own tax ramifications and its own compliance requirements. Invest in good legal and accounting support from the get-go—otherwise you could suffer tax penalties or fines for not following the law.
Justine Lackey is Chief Wealth Officer of Good Cents Bookkeeping. When she isn't balancing books, she is balancing work and family in Westchester, NY.