One of the first decisions a business owner must make when embarking on a new venture is how the company should be structured. The decision has far-reaching and long-term implications, so a proper consideration of the available options and their implications is vital.

Traditionally, the most popular business entities were the sole proprietorship, the corporation and the partnership. But, these traditional entities now require consideration of variations like the S corporation, limited liability partnership or newer business forms such as the limited liability company.

The choice of entity analysis requires a careful assessment of relevant income tax considerations. Each entity option offers certain tax benefits or traps that may pose problems in the future. Good business planning involves a review of the tax benefits and traps of each entity type and their potential relevance to the specific business model contemplated.

Some perceive the choice of entity decision solely as a tax-driven exercise. Although tax implications are vitally important, there are many important non-tax factors that can impact the ultimate decision. In most situations, the analytical process requires the business owner and the planner to make some predictions on what is likely to happen in the business’ future. Some of those predictions include:

• Potential for liability;
• Projected earnings and losses;
• Capital expansion needs;
• Possibility of adding new owners;
• Potential exit strategies;
• Likelihood of a sale;
• Estate planning needs of the owners;
• and a variety of other factors.

Consequently, the decision making process is not an exact science that produces a single perfect answer for every situation. There is a need to weigh and consider a number of factors, while being sensitive to the consequences of the alternative options.

This article is the just the introduction in a series in which we will break down the choice of entity in more detail and discuss many of the subtle issues involved. However, any entrepreneur considering forming or changing a business entity would be best served by gathering the relevant business facts and consulting with a qualified Tax-Business Attorney.