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 Hawaii, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection to shareholders and are conducive to raising capital, but they may be subject to double taxation unless they elect S corporation status. Partnerships, including limited partnerships, allow for pass-through taxation but vary in liability protection, with general partners being personally liable for debts. LLCs combine limited liability with pass-through taxation and are flexible in management and profit distribution. Sole proprietorships are the simplest form, with no separate legal entity from the owner, leading to personal liability for business debts. Each entity type has specific formation and maintenance requirements, such as filing articles of incorporation for corporations or articles of organization for LLCs with the Hawaii Department of Commerce and Consumer Affairs. Tax strategies, costs of formation and maintenance, and the ability to attract investors and offer equity incentives are key considerations when choosing the appropriate business entity in Hawaii.