As a new business owner, one of your first decisions requires determining the type of business your business will be. The type of business in this discussion refers not to the products and services you sell but rather the legal form of your business. It means choosing the correct legal entity for your business that fits the level of protection of assets, determines how your business income will be taxed and who can invest in your company.

Consider these three items when choosing the legal form of your business:

• Liability – Every business owner faces certain types of liability from the products and services they offer. The amount of risk depends on what you sell.
• Taxation – Certain types of businesses face double taxation for the owners. The business profits are taxed and then any profit distributions are taxed to the individual(s) receiving the income.
• Ownership – The legal form of your business determines how many people can have an ownership (investment) in your company.

Note that a business may change its form of business, so choosing a sole proprietorship today doesn’t prevent a super star business from becoming a corporation in the future. There may be some legal hoops, but it’s possible to change business entity forms.

Attorneys and Accountants

Don’t try cutting corners believing that a small business doesn’t need or can’t afford the advice of an attorney and accountant. Appropriate professional advice saves costly mistakes.

Next we discuss various types of business entities.