The Butler Venture Accelerator Program in collaboration with Pepper Hamilton LLP (http://www.pepperlaw.com) hosted a boot camp to help Babson entrepreneurs better understand the basics of business entity formation. Matthew Gilman and Steven London, representatives from Pepper Hamilton, spoke about the different forms of business organization, criteria in selecting appropriate form, formation of a corporation and formation of a limited liability company.

Pepper Hamilton covered the four most common ways in which a business can be organized:

  • Sole proprietorship – an individual is responsible for the entire business
  • Partnership – two or more individuals come together and share the responsibility in the enterprise. Partnerships can further be broken down into general and limited partnerships.
  • Limited liability company (LLC) or limited liability partnership (LLP) – owners have limited liabilities on behalf of the business i.e. the owners are not responsible for all the activities of the business.
  • Corporation. A corporation is a legal entity that can engage in any legal activity. It is not restricted to one particular area of operation.

The important question for a startup is which one to choose out of these four forms of business entities. Gilman and London suggested certain criteria which may be helpful while deciding which form of business organization to choose:

  • Liability of owners and managers each form of organization has a different level of liability of owners.
  • Management style – is the management going to be flexible and centralized or strict and decentralized?
  • Interests of the owners – this is long-term and a lot of entrepreneurs don’t think about this but this is really important to consider. How can one transfer equity of one owner to another if interests of the owners change at a later point of time in the business.
  • How much are you willing and able to pay for the formation and maintenance of your enterprise. Different forms of business organization have different costs attached to them
  • The last criterion to consider is the consequence that the organization form has on the taxes. All four forms have different tax costs attached to them.

Learning about the different types of business entities and how to organize is important for any startup. This knowledge will help you make smarter business decisions and can save you time and money. Use this information and criteria when deciding the business entity for your new venture, it can help answer a lot of questions that you probably have.