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What to consider when choosing a formation for a new business

On Behalf of | Oct 9, 2023 | Business Law

The Small Business Association reported that, as of 2022, there are over 4 million small businesses in California. If you are considering launching a new business in California, you know it is an exciting venture filled with hope, aspirations and the thrill of potential success.

One of the biggest decisions you will make regarding your business is that of selecting a business structure. The structure you choose determines how you operate, the taxes you pay and how much personal liability you face. It is not merely a decision of paperwork but one that shapes the trajectory of the future of your business.

Business needs

Before settling on a business structure, clarify the objectives and needs of your business. Are you a solo entrepreneur, or are you planning to have partners? How you plan to manage and grow the business also plays an important role in the decision-making process.

Personal liability

Different business structures offer varying levels of personal liability protection. For instance, a sole proprietorship holds you directly responsible for the debts of the business, while corporations offer more protection against personal liability. It is important to choose a structure that aligns with your comfort level regarding personal risk.

Tax implications

Taxation varies based on the business formation you select. Some structures, like sole proprietorships, mean you pay taxes on business profits as personal income. In contrast, corporations can lead to double taxation, where both the company and the shareholders pay taxes on profits.

Operational complexity

Some business structures require more administrative work and formalities than others. Corporations, for example, need to hold regular board meetings and maintain specific records. Consider structures like sole proprietorships or partnerships if you prefer a more straightforward operational approach.

Growth and investment potential

Your business formation can influence your ability to raise capital and grow. Investors might be more inclined to invest in corporations than in sole proprietorships. If you aim to expand your business significantly or seek external funding, factor this into your decision.

While there is no one-size-fits-all answer, understanding the nuances of each type of business structure and evaluating them against your business goals can pave a solid foundation for your entrepreneurial journey. Remember, the right choice now can make all the difference in the future success of your business.


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