The choice of the legal form for a business can have broad implications. It affects both the manner that the enterprise will be conducted and the personal affairs of the client.
The first step in making a good choice of entity is the preparation of a detailed business plan. The information gathered in the business plan and the experience of preparing the business plan will often make the choice of entity obvious. The business plan should not be viewed as a final completed product; but, rather the best approximation that can be produced at the current time. It should be updated periodically, say every 3 months as events unfold and circumstances change.
The business plan should include:
- what assets the client will contribute vs. lease or loan to the business;
- whether the client or the entity will be responsible for the business’s obligations;
- whether, and in what form, the business will continue after the client has ceased to participate in it;
- how interests in the business may be transferred and other participants brought in (or allowed out);
- how the client’s personal income tax liability will be calculated; and
- what the client’s optimum estate plan should be.
The decision also has a significant effect upon the relative complexity of the client’s legal and financial affairs and the degree of financial risk that the client will be exposed.
A sound decision often requires the client to consider the client’s current business situation and to examine such matters as the business’s long- and short-term prospects as well as the client’s general tax and financial affairs and, in many cases, those of the client’s family and business associates as well.