Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Arkansas, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. Corporations offer limited liability protection to shareholders but can result in double taxation, as the corporation pays taxes on profits and shareholders pay taxes on dividends. However, electing S corporation status can avoid double taxation while maintaining liability protection. General partnerships do not offer liability protection, as partners are personally liable for business debts, but they allow for pass-through taxation. Limited partnerships provide limited liability for limited partners but not for general partners. Limited Liability Companies (LLCs) combine the benefits of limited liability protection and pass-through taxation, making them a popular choice for many businesses. Sole proprietorships are the simplest form, with no separation between the business and the owner, leading to personal liability for business debts but straightforward taxation. Each entity type has different implications for attracting investors, offering equity incentives, and the costs of formation and maintenance. Arkansas has specific statutes governing the formation and operation of these entities, and it is advisable to consult with an attorney to determine the most suitable entity type based on the specific goals and needs of the business.