Whether you're just starting a business or already have a healthy, profitable one, should you care how your business is formed? If you haven't given it much thought, realize that your choice of a business entity could affect:

• Taxes,
• Estate planning,
• Legal and financial liabilities,
• State and federal obligations, and
• Management and ownership concerns.

Choosing the type of entity that's right for your business is a difficult decision. There are four basic ways to own and run a business:

Sole proprietorship,
Partnership,
Corporation, and
Limited liability company.

Each has its own unique characteristics. Therefore, depending on your situation, you will have to consider how important each factor is to you. For instance, how critical is it for you to:

• Have ownership and control?
• Limit your personal liability from legal challenges of the business?
• Shift income among family members?
• Have a simple way to divide ownership interests among several owners?
• Have centralized management when there are many owners?
• Take advantage of business tax benefits that are only available to legally-formed business entities?
• Easily transfer ownership?

Litigation can be a major threat to business owners. Who is responsible if your business fails or has losses? Every day, you probably come into contact with groups that are potential threats to sue you and/or your business, such as creditors, employees, customers, contractors, competitors, other owners, and government agencies.

If you deal with any of these groups as a sole proprietor or a general partner of a partnership, you can be held personally responsible for any business-related lawsuits. A separate business entity may be able to provide you with "limited liability" and protect you from personal liability for such damages and other obligations of the business. There are exceptions, however, if you fail to follow requirements as to how the entity should be set up and/or governed, or if you personally guarantee any obligation of your business.

As your business grows and your requirements change, the need to reevaluate how your business was formed becomes all the more important.

Updated: January 1, 2013

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.