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 Kansas, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. A corporation provides limited liability protection to its shareholders, but it may be subject to double taxation unless it elects S corporation status. General partnerships and limited partnerships offer different levels of liability and involvement in management, with general partners being personally liable for debts and obligations, while limited partners typically have limited liability. A limited liability company (LLC) combines the liability protection of a corporation with the tax benefits of a partnership, making it a popular choice for many businesses. Sole proprietorships are the simplest form, with no separate legal entity from the owner, meaning personal assets are not protected from business liabilities. Kansas law requires different formation and maintenance processes for each entity type, including filing documents with the Secretary of State and adhering to state statutes. Tax considerations, such as avoiding double taxation and optimizing for early losses or capital gains, are also critical in the decision-making process. Additionally, the ability to attract investors and lenders, offer equity incentives to employees, and the costs associated with forming and maintaining the entity should be carefully evaluated. An attorney can provide guidance on the best choice of entity based on these considerations.