Getting the choice of entity right at the start is crucial, since switching later can have tax and other consequences.

When you're getting started in business, it can be tempting to rush through to get to the good stuff. After all, you have a cool idea and an even cooler sounding name. Can't you just tack “LLC” onto the end using one of those online services?

The short answer is no. Entity selection is more important than you think. Your choice of entity can affect the number and identity of shareholders and partners, equity structure, control and management, as well as the type of funding you may be eligible to receive.

I know what you're thinking: why not just pick something to get started and change it if it doesn't work? Getting it right from the beginning is crucial. While it's true that you can make a switch later on, there could be tax and other consequences that may impact you in the long run. The best plan is to get it right the first time.

When making a choice about an entity, there’s a lot to consider, including two key things:

Entity choice can get pretty complicated. There are several key factors to consider, including liability, organizational control, potential funding sources, and tax implications. What follows is a brief primer on the most common forms of entity (with a focus on taxes, of course):

The sole proprietorship is the simplest form of business entity. There is no formal procedure to establish a sole proprietorship—no forms to fill out, no agreements to sign, and no documents to file with the state. With few formal accounting requirements, transferring personal and business assets in and out of the business is easy. However, the absence of formal requirements means that the owner of the sole proprietorship can be personally liable for the business’s debts and obligations, including tax bills and legal awards. When creditors, including the IRS, attempt to collect, they may be able to reach personal assets, like your house, to satisfy judgments.

For federal tax purposes, taxpayers do not file a separate tax return for a sole proprietorship. Income and expenses from the business are reported on an individual taxpayer’s Form 1040 on Schedule C. In some cases, that produces a less favorable tax result—but on the plus side, losses from your business can be used to offset other taxable income.

Establishing a partnership (or general partnership) is nearly as easy as creating a sole proprietorship—it's just an association of two or more individuals who agree to run a business for profit. As with a sole proprietorship, most states do not require formal procedures to establish a partnership—there are no forms to complete, no agreements to sign, and no documents to file, even though having these is advisable for business and legal purposes. In a general partnership, partners share liability for business obligations (typically, jointly and individually).

For federal tax purposes, although a partnership is required to file a separate return (Form 1065), the income and losses associated with the partnership pass through to the individual partners. Items of income or loss retain their character and are reported to each partner in proportion to their interest, as determined by statute or the partnership agreement. Each partner is then responsible for reporting that information on their individual tax returns.

A limited partnership is typically........

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