When starting a new business, one of the first questions an entrepreneur asks is, “What type of entity should I use?” This question is not one that should be taken lightly, nor is there a one-size-fits-all answer. There should be a great deal of discussion with the client and his or her attorney about the business operations, who the owners are today, who might participate in the ownership tomorrow, how the business will be financed, liabilities associated with the business, and what the eventual exit strategy might look like.

Most small businesses today are organized as S corporations for tax purposes because the S corporation avoids potential double taxation (unlike C corporations), allows working owners to be treated as employees, and limits employment taxes to reasonable salaries drawn by owners. The S corporation is not without its disadvantages, however. There are rigid rules about the number and type of shareholders and limitations on how income is allocated among shareholders. An S corporation may issue only one class of stock, although voting and nonvoting shares are permitted. Further, once property goes in, the owners generally cannot take it back out tax-free, and when shares in an S corporation are sold, there are limited situations in which the basis of corporate assets may be adjusted.

When starting a new business, one of the first questions an entrepreneur asks is, “What type of entity should I use?” This question is not one that should be taken lightly, nor is there a one-size-fits-all answer. There should be a great deal of discussion with the client and his or her attorney about the business operations, who the owners are today, who might participate in the ownership tomorrow, how the business will be financed, liabilities associated with the business, and what the eventual exit strategy might look like.