If you’re not sure which direction your business should go, use this business entity planning worksheet to get you on the right track. Using this, you’ll consider financing, liability risks and the type of business you have, to help you get things moving.
A business entity planning worksheet is helpful when you’re trying to figure out the best structure for your business. There’s no “one size fits all" approach to business formation. Incorporating is not a good fit for every business, but you should incorporate if you meet key criteria. The following worksheet should help you sort through your options and help you make a decision.
1. Type of Business
The type of business you form will depend on how many people own the business, your goals for legal and financial protection and how much oversight you want from the state where you do business. For example, if you’re not interested in annual filing requirements and certifications, then you wouldn’t incorporate. Here are the types of business entities you can choose from:
- Sole Proprietorship: Business is owned by one person. No paperwork is required to be filed with the state, in order to form the business.
- General Partnership: Business is owned by at least two owners. No paperwork is required to be filed with the state, in order to form the business.
- Limited Liability Company: Appropriate for sole proprietorships or general partnerships who want the “corporate" layer of protection, without all the legal formalities. You can become an LLC, even if you’re the only owner of the business.
- Limited Partnership or Limited Liability Partnership: LPs and LLPs must be registered with your state.
Corporation: Must file articles of incorporation with the state, and fulfill yearly filings and other report requirements.
This is just a brief overview of your options, because each state has its own laws, which are many, for all of these business entities. Keep in mind that you can protect yourself financially from lawsuits with commercial insurance. Filing as a corporation does not guarantee that you’ll never be held personally liable for your business activities. There have been many cases where a judge will hold the owner of a corporation personally liable, under a rule known as “piercing the corporate veil."
2. Liability Risks
Incorporating a business is one way to reduce your risk of personal liability, and it might be your best option, depending on the liability risks associated with your industry and your business. How much liability is involved in your business?
- Very little: In this case, buying insurance is better than incorporating your business.
- Medium risk: An LLC, LP or LLP may work if commercial insurance won’t adequately cover you and your partners.
- High risk: Consider incorporating, if commercial insurance won’t be sufficient.
Find out the norm for your business industry, for risk of liability. You don’t want to guess and find out you were wrong.
Having a small business attorney to help you is advised when you’re starting out on your entrepreneurship journey. Ask them questions based on this business entity planning worksheet during your initial consultation.
Image Credit: Matthew Bowden