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San Diego Business Formation: What Type of Business Entity Should You Form?

| May 23, 2014 | Firm News

Starting your own business remains part of the American dream. If you have finally decided to pursue that dream you will need to make many decisions before getting your fledgling business off the ground. One of the first decisions you must make is what type of business entity to choose for your business. Possible San Diego business formation options fall into three basic categories – sole proprietorship, partnerships, and corporations. Of course, you should consult with an experienced San Diego business law attorney before making a final decision; however, some of the factors to consider when contemplating your options include:

  • Ownership interests – if your business has more than one owner you can rule out sole proprietorship right off the bat. Beyond that, consider how active each owner plans to be in the business when deciding between a partnership or a corporation.
  • Liability – liability is a big issue when you own a business. In a sole proprietorship you are personally liable for both debts and acts or omissions of the business. This means that your personal assets could be at risk. By incorporating you remove the risk to your personal assets; however, incorporation may lead to unwanted tax consequences.
  • Tax consequences— how will your business be taxed? In a sole proprietorship or partnership you have pass through taxation, meaning that profits and losses “pass through” to the owners and are taxed at the personal income tax level. In a traditional corporation, you have double taxation, meaning profits are taxed both at the corporate and at the personal income tax level.
  • Growth potential – if you see your business growing rapidly, a sole proprietorship may not be the best option because it does not provide the structure needed for rapid growth and expansion.
  • Investment capital – if you plan to solicit investment capital, a corporation is usually the best option because potential investors like the structure and risk management features of a corporation.

There is no “one-size fits all” answer to choosing the best business entity for your new business. Each San Diego business formation option has benefits and drawbacks. Moreover, there are a number of hybrids or variations on the basic three options that might work for your business. Instead of a traditional C corp, for example, you might consider an S corp. Be sure to sit down with an experienced San Diego business law attorney and discuss your plans as well as the advantages and disadvantages of each option before making a decision.