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Selecting the Right Entity for Your Business

Written by prositesfinancialFeb 13 • 3 minute read

tax strategies for business owners

Do you finally want to ditch your day job and venture into business? Are you still saving for your dream business? Well, you are not alone. A majority of us still aspire to own successful business enterprises. We all want to make millions without asking for bank loans. One of the best avenues to get such an opportunity is through entrepreneurship.

Entrepreneurship is a journey with several phases, and one of the most crucial stages of is determining the structure of the business from the very beginning. The type of structure you choose can either make or break your business, which means that you have to make the right entity choice from the start.

So, what makes your entity choice important? Your entity choice determines:

Your Legal Responsibility

Every business comes with several risks. And your business entity choice is what determines your level of responsibility when something wrong occurs. Although there are various factors to consider when it comes to how liable your business is, the primary determinant is your business entity.

The business entity you choose will determine whether you can personally be held liable for any lawsuits leveled against your company. By selecting the right entity from the very beginning helps in shielding your assets from the potential business liabilities. Some of the entities that protect your assets from potential business liabilities include Corporations, S corporations, and limited liability company

Your Tax Liability

Every business set up in the US needs to pay taxes. And what determines the amount of taxes you pay is your business entity and the amount of income the business has made within a particular taxation period. Double taxation is always a sore point for most companies. Thus, you have to ensure before you make a choice, you look at the revenue your business offers.

You also have to learn how the different entities are taxed. For example, a C Corporation is subjected to double taxes from both the federal and state government. The company owner must also make tax payments of the income they bring in from the corporation.

While Limited Liability Companies and S Corporations avoid double payments entirely, the taxes imposed on these two types of companies rest solely on the investor’s and owner’s income from the business. However, the disadvantage of this is that S-Corp owners have their salary taxed while LLC owners have their profit taxed as well.

Now, what happens when you choose a business entity that is way above your revenue? You can even end up bankrupt from double taxation. Thus, taking time to select the right entity from the beginning is essential.

Business Continuity

Every entrepreneur wants to see their business grow beyond their initial vision, and one of the main contributors to business endurance is the type of business entity. If your goal is to develop and secure a financial future for your business, then make sure you select a business entity that offers legal structures. Legal structures will not only help secure your family’s future; it will also give your business vision a sense of permanency. Therefore, before you make a choice, try and consider how you envision the continuity of your business.

Cost of Business

The success of a business depends significantly on how much you require to run it, and the type of entity you choose will either make it easier or more difficult. Some entities have more statutory requirements than others, and meeting those requirements means sharing a portion of your income with the regulator through the payment of licenses and taxes. Thus, choosing the right entity from the beginning can help reduce your running cost significantly.

For those who want to start your business, make sure you choose the right entity from the beginning by considering the factors highlighted above. Your choice may determine the success or failure of your business, so the wise move would be to seek out the counsel of an expert who is familiar with your industry. Getting the right advice from the start can save you time and money and increase your chances of success.

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