Choosing the Right Business Entity

Starting a business entails careful planning and understanding of both the substantive and procedural aspects of forming it. Considering both aspects will determine other important business characteristics such as legal liabilities and tax considerations.

A potential business owner must understand how to best protect its business assets as well as how to get the best tax breaks out of a business structure.

Common Business Structures

Choosing the right form of business entity will help minimize costs and liabilities. The following are the various entities a potential business owner can choose from.

Sole Proprietorship

A sole proprietorship is the quickest and easiest way of setting up a business. There is no specific cost requirement in forming it. Neither is there a blanket prerequisite aside from those minor formalities which may apply to all business entities such as:

1. Getting an occupancy permit from the place of business
   
2. Obtaining a business license
3. Applying for a registration or franchise number - This number is used to monitor sales tax collection purposes.

The above requirements can be accomplished without the assistance of a lawyer or an accountant. In this type, the business owner is the sole owner. Hence, he has the full control and responsibility of the business operation.

General partnership

Next to sole proprietorship, general partnership is relatively easy to process. There are no costs or formalities required. However, to avoid potential disputes, the following are best to be in writing:

1. Amount of contribution each partner is expected to give
2. Rights, obligations and duties of each partner
3. Sharing of profits and losses
4. Salaries and cash withdrawals
5. Resolving business disputes between and among partners
6. Rules on taking in new partners
7. Dissolving the partnership

Limited Partnership

In limited partnership, a limited partner is liable only up to the extent of his investment. This means that a limited partner may not be held liable more than his contribution. The law protects a limited partner from further liability unless he plays an active role in the partnership operation.

Corporation

A corporation is an artificial being with a personality separate and distinct from the individuals creating it. The incorporators may simply file an application for charter putting on records the following facts:

1. Purpose of incorporation
2. Names and addresses of the incorporators
3. Amount and type of stocks issued
4. Rights and privileges of the stockholders

The above information may be overwhelming for a potential business owner. Hence, it is best to consult a business lawyer in choosing what business entity to pursue.