What does it mean to “start a business?” Starting a business is different from forming a business entity. In the U.S., starting a business can be as simple as marketing or selling products or services. Forming a business entity, on the other hand, refers to registering a legal entity used to conduct business–a company–with the state in which you want to conduct business.
Business entities are legal structures used by business owners to take advantage of certain benefits, including protection from liability and tax benefits. Someone can start a business without forming a business entity, but it’s generally a good idea to form a business entity first, so the business and its owners, employees, directors, etc. are protected and the business owner can take advantage of all available benefits from the start.
Which business entity is right for you? There isn’t necessarily a “right” choice, but some entities are better options for certain businesses and setups.
In the U.S., each state has different rules about forming business entities and operating businesses. Business owners can choose any state to set up their business entity, but typically, business owners choose either (1) the state in which they are going to operate the business; or (2) a state with favorable business laws. Delaware is generally the most popular state people choose to set up their business entity because it is easy to file incorporation documents online, incorporation and maintenance fees are low, and it has a well-settled body of corporate laws people can rely on in the event of a business dispute. When choosing a state, business owners typically consider the cost of filing to set up the entity, the tax implications of forming the entity in that state, and whether that state makes it easy for business owners to create and maintain their business.
The main types of business entities in the U.S. are: sole proprietorship, limited liability company (“LLC”), partnership, corporation, and nonprofit corporation.