Starting a new venture involves making multiple decisions. One of the first decisions, and by far the most important, is your entity type. The entity you select can protect you and your personal assets, or it can put you at risk. Selecting an entity is not something you should do haphazardly.

Instead, you should consult with a business attorney and weigh your options to find the right entity based on your business goals, employees, and risks.

4 Types of Business Formations

When starting a venture, you have four main types of business formations to select from:

  • sole proprietorship
  • general partnership
  • limited liability corporation
  • a corporation

Sole Proprietorship

You might be the only person working in the business, but picking sole proprietorship means you have no personal protection from the actions of your business entity. While it is the easier and cheaper option, most attorneys will advise you against this business formation.

A sole proprietorship only makes sense if your business has minimal to no risks. Otherwise, any lawsuit that may arise from your business dealings puts your personal assets – including your home – at risk.

A sole proprietorship is:

  • Easy to form and start
  • Simple for taxes because you report the taxes on your personal tax return
  • Without any protections as the owner – which means your personal assets are at risk

Partnership

A partnership means you have two or more owners involved in the business. Most partnership formations do not offer protections – therefore, you need a strictly written agreement between you and all partners involved with respect to business decisions and liability. After all, if Partner A does something that causes a lawsuit against the business, Partner B needs protection from his or her actions.

Facts about partnerships:

  • Partners are still personally liable for business lawsuits.
  • The entities are easy to form and manage.
  • Owners still report shares of profits and losses on personal tax returns.
  • Minimal state requirements.

Limited Liability Corporations

Limited Liability Corporations or LLCs are independent legal formations which separate your business from your personal assets. Therefore, LLCs offer much more protection than a partnership or sole proprietorship. If you have more than one owner, you can also form a Limited Liability Partnership (LLP).

When you do not want to become a corporation, an LLC or LLP is your next best option.

An LLC and LLP are:

  • Separate legal structures from the owners
  • Operated with agreements
  • Free from the requirement to hold annual meetings and submit to the government
  • Not limited to the number of owners that they can have
  • Taxed like sole proprietorships – unless owners request to be taxed like corporations

Corporations

Corporations offer the most protection, but also have strict requirements. If you do not follow the requirements of a corporation, you can lose your protections. To have a corporation, you need a corporate structure, which consists of:

  • Shareholders (owners of the business)
  • Board of directors
  • Officers

In a small corporation, the shareholder could also be on the board of directors and be the officer. You are not required to appoint different people to each position.

Consult with a Business Attorney in San Jose, CA First

Before you select your entity type or form your business officially, it is best that you consult with a business attorney. An entity formation attorney has experience setting up businesses and can advise you on which formation is best based on your business goals and needs. Furthermore, your attorney can help you form the business, handle paperwork requirements, and represent your business if an issue should arise.