What your entity says about your business

What type of entity is your business? I am always surprised to talk to business owners and learn that they are unsure of what type of entity they formed for their business. And the ones that do know usually don’t understand how their entity type affects the classification of their daily, monthly, and yearly transactions. For instance, are you aware that a C-Corp treats owner pay as an expense, but an LLC treats the owner’s pay as a reduction in equity? An expense affects the Profit and Loss and equity transactions do not.

If you are a single-member LLC, do you know if your business is classified as a disregarded entity or an S-Corp? Do you even know what a “disregarded entity is”? or Why this designation is important?

If you are doing business as a sole proprietor are you aware that this entity type is not a true legal entity and it does not provide any personal liability protection? All too often liability concerns don’t cross the minds of new business owners…”What could possibly go wrong, it’s just me working out of my home?” You would be shocked at the number of things that could happen.

Your choice of business entity, cannot be a haphazard decision made because you have to get your doors open. The entity type you choose for your business has to be one of the first decisions you make. It determines how you pay taxes, the classification of certain transactions, and can protect your personal property from a lawsuit.

Please make sure you protect yourself by understanding your business entity type.

Pro Tip: Please don’t form an entity type based on what a friend says or what another business owner has done. Chances are, that company’s business formation and tax situation is not exactly like yours. Their entity type might not be your best choice. A tax attorney or tax accountant is a great resource to help you decide on the proper entity for your situation.

The article is for informational purposes only and should not be construed as business, accounting, or legal advice. Details are subject to change without notice.