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Why choosing the right formation for your company matters

On Behalf of | Apr 23, 2024 | Business Law

Starting a business in Maryland is an exciting venture. Before you dive into the market, one of the first decisions you’ll face is choosing the right business structure. This choice will impact many aspects of your business.

Therefore, understanding the different types of business formations and selecting the right one is important for your business’s long-term success and operational efficiency. It is important for all business owners to understand the key reasons why choosing the right business structure is necessary.

Liability protection

One of the primary considerations when choosing a business structure is liability. Different structures offer different levels of personal liability protection. For example, sole proprietorships and partnerships generally provide no separation between personal and business assets. This means personal assets are at risk if the business incurs debt or legal issues. In contrast, LLCs and corporations provide limited liability protection, meaning personal assets are generally protected from business liabilities.

Tax implications

Each business structure comes with distinct tax responsibilities. Sole proprietorships and partnerships pass business income directly to the owners’ personal tax returns, potentially simplifying the tax filing process but possibly leading to higher personal taxes. LLCs offer flexibility, allowing owners to choose whether they want to be taxed as a sole proprietorship, partnership, or corporation. Corporations face double taxation—once at the corporate level and again on dividends—but this can be mitigated in some cases with S corporation status.

Fundraising capabilities

The type of business structure you choose also affects your ability to raise funds. Corporations are typically better suited for raising capital through the sale of stock. On the other hand, LLCs are attractive to small businesses because they provide more flexibility without the formalities of a corporation, but they might not be ideal for businesses that plan to go public or seek venture capital.

Understanding the characteristics and benefits of each business form can help you make an informed decision that aligns with your business goals and growth strategies. This foundational decision sets the stage for the future of your business, influencing operations, profitability, and overall success.