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 Washington State, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. Corporations offer limited liability protection to shareholders and can attract investors, but they may face double taxation unless they elect S corporation status. General partnerships involve shared liability among partners, while limited partnerships offer limited partners protection from liabilities beyond their investment. Limited Liability Companies (LLCs) provide limited liability and flexible tax options, as they can choose to be taxed as a sole proprietorship, partnership, or corporation. Sole proprietorships are the simplest form, with no separate legal entity from the owner, meaning personal assets are not protected from business liabilities. Washington State requires different formation documents, annual reports, and fees for each entity type. Tax considerations, such as avoiding double taxation and optimizing for early losses or capital gains, are also crucial. Additionally, the ability to offer stock options may influence the choice if incentivizing employees with equity is a goal. The costs of formation and ongoing compliance vary by entity type and should be factored into the decision-making process.