One of the most basic questions anyone thinking about starting a business should consider regardless of how small or how large that business may be at the outset is the question of what legal form their business should take. There are several forms a business can take and it is important to choose what’s best both for the business and its owners.
There are, of course, pros and cons to each available form but choosing the best form for your business can increase the ultimate profitability of your business for you as an owner while limiting your personal responsibility for the liabilities of your business. Also, if there will be more than one owner of the business, there are potential threats to the business that should be answered before business begins such as questions of what will happen if an owner dies or wants out of the business.
The cost and effort of careful planning before starting a business often seems an unnecessary expense and distraction to entrepreneurs intent on pursuing their business dream. Yet such planning is essential if the business is going to maximize profitability for its owners and survive the possible events that could otherwise bring the business to a premature death.
What follows is not intended to be an all encompassing discussion of all those pros and cons. Instead, this article is only a brief sketch of some of the principal benefits and drawbacks to each form for doing business.
Also, this discussion only addresses issues in closely held entities and does not speak to the peculiar issues of publicly traded entities or to various securities law issues that may arise even in the context of a small, closely held business entity.
Finally, it’s important to note that this discussion relies on Oregon law. While the law of other states may often be identical or similar, it is essential to determine the best form of business entity on the basis of the law applicable to your anticipated business activity.
A sole proprietorship without distinction between the business and its single owner is the easiest form of business to run, at least in the beginning. In a sole proprietorship there’s no difference between the owner and the business because the owner is the business and, at least to a large extent, the business will be the owner. In a sole proprietorship:
1. The owner is personally liable for all of the obligations and liabilities of the business; and,
2. The owner will, in addition to income taxes, pay self employment taxes on all business income.
These considerations generally make the sole proprietorship an unacceptable form of business entity to most individuals starting a new