If you think about your business as having 3 parts—Creativity, Structure and Relationships—that law supports and protects, Structure is the backbone that defines your business.

This free legal information is made available courtesy of Counsel to Creativity.

Your business entity—together with your business model—creates that backbone.

What is a business entity?

A business entity is a legal structure for your business.  It encapsulates your business and creates a separate entity from the owner or owners.  This has benefits.  Which benefits depends upon which business entity you choose.

You can choose to structure your business as one of four basic entities:  a Sole Proprietorship; a Partnership; a Limited Liability Company; or a Corporation.  Each business entity has certain advantages and disadvantages.  But more importantly, each offers a particular fit for a set of particular business needs.

So, what’s the difference?  And does it matter? 

The short answer is, Yes, it matters.  You want to choose the entity that provides the best fit for your business.

Why?  If there’s a misfit between the entity and your business’s needs, it can have a less than optimal—if not detrimental—impact you and your business.

How good the fit of a business entity is for your business depends upon what you’d like to accomplish in the Control, Liability and Tax of the business—and what that accomplishes for you personally.

Control.  When we look at Control in a business, we’re looking at who owns the business and who manages it.  This may or may not be the same person or people.  How much flexibility you want and need in the Control of your business will impact which entity is the right fit.

Liability.  When we look at Liability, we’re looking at who’s responsible if something goes wrong.  Are you personally liable for the responsibilities of the business or is the business alone responsible?

Tax.  When we look at Tax, we’re looking at how much of what both you and the business earn goes to Uncle Sam and your state and which entity will allow you to legally reduce that amount.

Each of the four ways of structuring your business accomplishes different things—and has different implications—in the Control, Liability and Tax of your business.  And that impacts you differently.

Take a minute and ask yourself:  Who owns and manages my business?  Where does liability fall in my business—on me or it?  What are my tax obligations?  Do I want anything to change? What?