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 Pennsylvania (PA), the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The common types of business entities include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection to shareholders but can result in double taxation, as income is taxed at the corporate level and again as dividends to shareholders. However, S corporations can avoid double taxation while still providing limited liability. Partnerships, including general and limited, offer pass-through taxation but vary in liability protection, with general partners being personally liable for debts and obligations. LLCs combine the benefits of limited liability and pass-through taxation, making them a popular choice for many businesses. Sole proprietorships are the simplest form, with no distinction between the business and the owner, leading to personal liability for business debts. Pennsylvania requires different formation documents, such as Articles of Incorporation for corporations or Certificates of Organization for LLCs, and has ongoing maintenance requirements like annual reports. The choice of entity should be made considering asset protection, tax implications, attractiveness to investors and lenders, the ability to offer equity incentives, 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.