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 North Carolina, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The state allows businesses to be structured as corporations, general partnerships, limited partnerships, limited liability companies (LLCs), or sole proprietorships. Corporations offer liability protection but can lead to double taxation, whereas LLCs provide liability protection with pass-through taxation, avoiding the double tax. Partnerships vary in liability and tax implications, with general partners typically having personal liability, while limited partners and members of limited partnerships enjoy limited liability. Sole proprietorships are the simplest form with no separation between personal and business assets, leading to personal liability for business debts. North Carolina requires different formation documents for each entity type, such as Articles of Incorporation for corporations and Articles of Organization for LLCs, filed with the Secretary of State. Ongoing compliance includes annual reports and potential franchise taxes. The choice should consider asset protection, tax implications, financing and investment prospects, the ability to issue stock options, and the costs of formation and maintenance. Consulting with an attorney and a tax advisor is recommended to determine the most suitable entity type for a specific business.