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 Delaware, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. Delaware law allows for the formation of corporations, general partnerships, limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection to shareholders but may be subject to double taxation unless they elect S corporation status. General partnerships do not offer liability protection, while limited partnerships provide limited partners with liability protection but not general partners. LLCs combine liability protection with pass-through taxation, making them a popular choice. Sole proprietorships are the simplest form but offer no personal liability protection. Delaware is known for its business-friendly legal environment, particularly for corporations, and many companies choose to incorporate there for its well-established corporate law. The state requires entities to maintain good standing by filing appropriate documents, such as annual reports and paying franchise taxes. When choosing an entity, it's advisable to consult with an attorney to consider personal asset protection, tax implications, attractiveness to investors and lenders, the ability to offer equity incentives, and the costs of formation and maintenance.