If you’re gearing up to launch a new company, you’ll want to formalize your business structure sooner rather than later. Registering your company will formally alert the state to the existence of your new business and will allow it to operate lawfully within that particular jurisdiction.
Registering your company in whatever state of incorporation you’ve chosen will also allow you to apply for a federal employer identification number (EIN). Once you have this number in place, you can apply for business financing, open a company bank account, hire employees and engage in a host of other activities that will likely need to be completed before your new business can become operational.
The 4 primary business formation structures
You have four main options to choose from when tackling the business formation process:
- Sole proprietorship: No personal liability protection, maximum managerial control, taxed on the single owner’s personal return
- Partnership: No personal liability protection ordinarily, taxed on the returns of the company’s multiple owners, flexible managerial structure
- Limited liability company (LLC): Personal liability protection, can be taxed as a corporation or on the personal returns of members, limited reporting requirements, relatively flexible managerial structure
- Corporation: Owned by shareholders, managed by a board of directors, taxed as a distinct legal entity, maximum personal liability protection, offers the ability to raise capital quickly through the sale of shares, significant reporting mandates, heavily regulated
Making the best choice for your company
Choosing a business formation structure is a consequential decision. This choice will affect company matters as varied as how your business is taxed to the degree of personal liability you may be forced to incur if your company is sued. Don’t commit to a particular business structure until you’ve considered all of your options carefully.