Entity formation is what a person or persons do to form a company. The choice of business entity will affect how the new business is structured. Business entities operate as legal individuals that own and manage assets and that may incur liabilities. The entity itself is formed at state level.
In order to structure a business in the efficient way to meet the goals of directors and investors, two things must be considered: liability protection and taxation. Each situation is unique and before choosing an entity, it is usually best to discuss the various alternatives with an accountant and business lawyer.
Businesses may be formed in one of many ways, including partnerships, limited liability partnerships, limited liability companies, corporations and sole proprietorships. Determining the structure of a business will assist in assessing liability protection. Personal liability is a major consideration when choosing a business entity. Sole proprietorships and general partnerships do not protect owners from liability, and personal assets may be seized in the course of a legal action against the business. High risk entities may choose limited partnerships, LLC, LLP, S or C Corporations, which limit the personal liability of the owners.
Others things to consider are taxes, management, owner transition and capitalization.