Important Factors to Consider Prior to Business Entity Formation

There are many nontax and tax factors that should be taken into consideration prior to the formation of a business entity. Choosing an improper business entity for your type of business may result in significant business, legal and tax consequences in the future. To avoid potential harmful consequences for your business after its formation, a business entity formation attorney should be consulted.

A business may be structured in several different ways. The types of business entities include a sole proprietorship, general partnership, limited partnership, limited liability company, corporation, and joint venture. There are also different types of corporations such as a S-Corporations, C-Corporations, Professional Corporations, Close Corporations, and Non-Profit Corporations.

A business entity formation attorney will advise you regarding the many factors to consider prior to the formation of a business entity such as management and control, limitation of liability, availability of capital, transferability of interests, among others.

One important factor a business entity formation attorney will advise the principals with regard to opening a new business is limitation of liability. Liability of the principals will vary depending on the type of business entity. For example, a business entity formation attorney will advise that a sole proprietorship or general partnership will not insulate the principals from losses generated by the business. However, a corporation and a limited liability company will shield the principals from the liabilities of the business, with some exceptions.

Another important factor a business formation attorney will advise the principals regarding the choice of a business entity is management and control. A brief example regarding the differences in the management and control of the various business entities is:

• Sole Proprietorship: All management and control rests in the owner.
• General Partnership: All partners share equally in the management and control of the business unless the partnership agreement states otherwise.
• Limited Liability Company: Managed by all of its members, or by one or more managers who may but need not be members.
• Corporation: Management and control will vary depending on the size of the corporation and the number of shareholders. Generally, the management and control are delegated by the shareholders to the board of directors. The board of directors then appoint officers to manage the day-to-day business operations and to implement the board of directors’ decisions.

These are just a few of the many important factors to be considered by the principals prior to the formation of a business entity. That is why it is important to consult with a business formation attorney to avoid potential future problems for your business.

Consultation with a business formation attorney is also important for many post business entity formation matters that may arise such as filings to comply with licensing and governmental regulations, protecting intellectual property, and negotiating, drafting and reviewing various types of contracts to limit the risk of liability for the business and avoid potential litigation.

Prior to starting a new business, contact the business entity formation attorneys at Mazis Law Group to assist you with the formation of your business entity.