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Entity Selection, Formation and Structuring

Merchant Law Firm PLLC > Entity Selection, Formation and Structuring

When you set out to form your own business, there are many things to consider. Perhaps one of the most important considerations is the type of business entity you choose to form.

There are several different types of entities that can be chosen. The most common forms of entities are Limited Liability Companies (LLCs), Corporations, and Limited Liability Partnerships (LLP’s). These entities all are formed to protect owners from personal liability.

Prior to selecting a specific business entity, many factors should be considered including but not limited to, the following:

  • Tax Consequences: The type of business entity you choose can affect the tax consequences for the company and its owners. Certain business entities, such as an LLC can provide tax savings by passing income directly to the owners. Corporations may not have the same advantages unless an election is made.
  • Cost: There are two components to consider when thinking of cost: cost of formaiton and costs of maintenance. Depending upon the state in which you form your company and the type of entity you select, there may be annual fees for maintenance. For example, in Arizona, Corporations must file an annual report and pay a fee; however, for LLCs there is no annual report or payment requirement.
  • Maintenance: Although it is important to document important transactions and to have meetings, some entities do not require maintenance once they have been established. Others require serious record-keeping effort in order to comply with state regulations.
  • Ownership: Different entities have varying rules for how many owners may have equitable interest. Ownership rights and interests are important when looking towards future growth and possibility of public ownership at a future point.

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