Q Why Does Business Formation Matter to Me? Have you ever thought about owning your own business? Do you know what type of business form you would choose—sole proprietorship, corporation, or something else? Rawpixel.com/Shutterstock.com Choosing a form of business is a crucial decision that all entrepreneurs must make when starting a new business. The form of business an entrepreneur chooses impacts many aspects of the new company, including ease of formation, startup costs, retention of profits, tax implications, and liability for debts—just to name a few. Sometimes these decisions are easy to make. For example, if an entrepreneur is going into business with a friend or family member, then the option to form a sole proprietorship is off the table. Additionally, if the entrepreneur wants an easy transfer of ownership after they retire or pass away, then a corporation may be the best option. The following are four common forms of business: 1. In a sole proprietorship there is one single owner, and they are liable for any debts the company incurs. The owner treats profits like their own personal income. 2. In a partnership, two or more people act as owners and share profits. The owners are personally liable for any debt the company incurs. 3. A corporation is a legal entity that is separate and distinct from its owners. A corporation has limited liability for debts incurred. Corporations have an advantage in raising large amounts of capital, but it is expensive and complex to form a corporation. 4. Finally, a limited liability company (LLC) combines the advantages of a corporation and a partnership while avoiding some of the disadvantages to those business forms. Refer to the following scenario to see why business formation matters to you and the world around you. Imagine that after graduation, you decide to start a business. You will use your personal savings to start the business, and your cousin is willing to invest a sizable amount of her savings into your business as well. You aren’t sure which form of business to choose, but you know that you want business formation to be fairly easy, and you want to limit your responsibility for any debt the company incurs. In addition, you want to be able to control most of the aspects of the business, at least early on, but you envision passing the business on to future generations of your family after you retire. Why Does Business Formation Matter to Me? Assessment question What form of business should you choose?