If you are planning to start your own business in Arizona, a significant aspect of it is choosing the proper entity structure for your business, and it is not something that business owners should take lightly because it does have essential implications in the short, medium, as well as long term.
The type of structure you opt for impacts the operational, legal, and tax strategy of your business. There are specific kinds to choose from, and they vary from one another in numerous aspects.
If you are having a hard time setting up the business as you are not entirely aware of the different obligations and operations, Phoenix business law firm can help you with that because the circumstances of every entrepreneur can be unique.
Thus, it would help if you had proper consultation to understand what suits your business. In this particular blog, we are going to dive deeper into the five most common business entity structures by highlighting what factors need to be considered.
Factors to Consider While Choosing the Right Entity Structure
Opting for the proper entity structure is vital because it has long-term implications. Businesses can change their structure later on, and they often do so as they evolve, but that is costly to execute and can be disruptive. Thus, it is better to choose an entity structure while keeping your current position as well as your future in mind.
Various factors need to be taken into proper consideration before moving ahead with a specific entity structure. Let’s have a look at them in more detail:
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Desired Tax Treatment
A business can generally be either a C corporation or a flow-through entity. The distinction essentially decides how the company is going to be taxed, both on a current basis and when the business is sold eventually.
In a flow-through entity, all the incomes and losses are passed on to their owners, who are supposed to report it and pay taxes on their personal income tax returns.
The rates vary on the basis of the income bracket in which they fall. On the other hand, when we talk about C corporations, income is taxed two times, the first time at the corporate level and again when the shareholders get dividend income.
If the company is being sold, the manner in which the proceedings of the sale are specified is directed by entity structure, too. Flow-through structures let sellers realize a capital gain and at the same time, give acquirers a step up in basis but lack certain tax benefits specific to C corporations.
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Personal Liability Protections
A significant concern for a lot of entrepreneurs is personal liability protection. Some business structures, such as LLCs and Corporations, protect the personal assets of business owners against the liabilities of the business. On the other hand, structures like general partnerships and sole proprietorships provide no such shield.
If a business owner goes with types like LLCs and Corporations, their assets, as well as other assets, can be protected from their creditors.
However, suppose the business has a sole proprietorship or general partnership structure and faces an enormous lawsuit. In that case, it will not only be the business at stake but also the personal assets of the owner.
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Unique Administrative Requirements
Every type of entity structure comes with its own set of unique administrative requirements, both in the initial phase and on an operational basis. Now, consider it as a spectrum where, at one end of it, there are sole proprietorships.
No registration processes or filing requirements are there to set up. You can start doing business. But keep in mind that you have no liability protections, which is a significant disadvantage.
On the other hand, you have C Corporations, which require quite a few things and are more costly to establish but come with several important advantages. Different kinds of entities lie somewhere in between.
Let a Business Law Firm Help You Setup!
A business law firm possesses excellent knowledge of how and what needs to be done to start a good business. Allowing them to help you simplifies the entire process.
