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Does entity selection really matter?

By Sean M. Hugo, CPA

How to start a business

One of the first steps in starting a new business is deciding what type of entity to form, if any.  Business owners have number of different entity structures to select from when setting up a new business.  A few of the more common are listed below. 

  • Sole Proprietor
  • General Partnership
  • Limited Partnership
  • LLC
  • S-Corp
  • C-Corp

The type of business entity selected will dictate what is required to start the business.  There are different rules that must be followed for each type of entity. 

What most business owners don't know is by selecting the right entity structure they can reduce their tax burden around 15% on the profits of the company.  Think about that for a minute tax savings of 15% each year on the profits of the business for the life of the business.  The amazing thing is most business owners don't even seek out professional guidance when making this decision they just do what their buddy did when he or she setup their business.  Additionally, you may be putting your personal assets at risk to creditors or lawsuits if you select the wrong type of entity. 

Before you setup the business meet with a qualified CPA and seek professional advice before you make the decision.  The money you spend on fees could save tens of thousands of dollars in taxes over the life of the business and reduce a lot of unnecessary headaches.  You will be in good shape if the rest of your investments in your business result in that type of return on the money spent.