June 6, 2014. While a Limited Liability Company is usually my entity form of choice, there are a number of factors that play into choice of entity when forming a new company. Answer these ten questions and you’ll help your lawyer help you make the best choice.
- Do the parties want profits and losses to pass through to their personal income tax returns?
- Will all of the parties be actively involved in management?
- How much capital is needed?
- How much will be raised from third parties? Debt or equity? Likely sources?
- What would the parties providing capital expect in return?
- Is there a form of entity that the funding source prefers or, alternatively, would like to avoid?
- What level of corporate formality is possible or desired?
- Is the business ineligible for certain forms of entity?
- How much flexibility is required for structuring ownership and management?
- What is the expected length of the investment/venture and what is the exit strategy?
Most entrepreneurs appreciate the many benefits of forming a legal entity for the operation of their new business venture, such as shielding themselves from the liabilities of the business, raising capital, and providing a business framework. Do you understand why you want to form a certain type of entity? I always like to follow the fancy business school method of KISS (“keep it simple, stupid”).