The selection of the appropriate type of entity is an extremely important consideration when forming a new business. The decision of the appropriate type of entity touches on many relevant issues, including limitation of the owner's liability, how the entity will be managed, and how the entity will be taxed. Obviously, it is best to agree these issues before starting the business in order to avoid using an entity that does not achieve your desired goals.

The basic types of entities available in Georgia are the sole proprietorship, the corporation (including both “C” corporations and “S” corporations), general partnerships (including limited liability partnerships), limited partnerships (including limited liability limited partnerships), and limited liability companies. Each type of entity has its own unique advantages and disadvantages.

For instance, while limited liability companies have become very popular in recent years, there may be disadvantages to creating a limited liability company for an operating business. In most cases, all earnings of a member who is actively involved in the trade or business conducted by the limited liability company will be subject to self employment tax. The self employment tax could possibly have been reduced by forming the entity as an “S” corporation instead. Conversely, in many cases it makes sense to structure the entity as a limited liability company if the entity is intended primarily to hold investments; in many cases, the investments can be distributed from the LLC on a tax-free basis, which cannot be accomplished with a corporation.

As can be seen from the foregoing discussion, it is imperative that a new business be formed in an appropriate entity to achieve the objectives desired by the business owners.