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Entity formation requires careful consideration

Starting a business requires a plethora of decisions to be made. Many Maryland business owners would say that entity formation is one of the most crucial aspects of the process. The type of entity under which the company is formed could have a significant impact on its future.

There are numerous ways in which a new business can be formed, and each of them comes with varying degrees of liability. Furthermore, each comes with certain tax implications. Many factors need to be considered when deciding which type of entity will provide the best benefits to the owner, or owners, of the business.

In a sole proprietorship, the owner retains control and responsibility for all of the business's liabilities and assets. Partnerships come in a variety of forms, depending on the agreement between the parties who are starting the business. Each one has differing levels of responsibility and liability.

Small businesses can be formed as S corporations, which have similar requirements to C corporations. The difference is that the owners are taxed personally. A limited liability company (LLC) provides some of the same advantages of a corporation, but the tax implications are more analogous to a partnership. In addition, an LLC enjoys the same operational flexibility that partnerships enjoy.

To fully understand the implications of entity formation, it would be beneficial for any Maryland entrepreneur who is looking to start a business to consult with an attorney. Each entity type has certain reporting and documentation requirements that must be adhered to in order to maintain the company's legal status. If keeping up with those requirements is not feasible for the business, the protections owners enjoy could be compromised, which could, in turn, put the future of the company in jeopardy. Therefore, this decision should not be taken lightly.

Source: sba.gov, "Choose Your Business Structure", Accessed on July 22, 2016

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Daniel S. Willard, P.C.
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