One of the preliminary steps for starting a business is choosing the proper business entity. Forming a business entity is always a best practice as operating as a sole proprietorship or traditional partnership leaves you open to personal liability in ways that no one would ever want. The good news is that forming an entity is quite simple in pretty much all states and requires filing some sort of organizational documents with the state that list out the basic contact information for the business and where you’ll be operating. This can often be done on your own, although it’s generally good to seek the advice of a business attorney to make sure that you’re doing everything properly to protect yourself. The more complicated part is choosing which entity you want to use and where you want to organize.

Which?

When is comes to choosing between entities, there are 3 most common options: LLC, S-Corp, and C-Corp. A brief general overview of the differences is found here. Choosing between them really comes down to what the end goal of your business is. S-Corps are generally ok for small businesses with a limited number of partners. Beyond that, problems can arise. LLCs (Limited Liability Company) are good for small to medium sized businesses with some investors or others that could benefit from taking a larger share of the losses when passed through to personal income. C-Corps are ideal for larger businesses that have the potential for going public or that seek venture capital funding.

As you can see, the issue of scale can be an important consideration. In general, the LLC is the most flexible option and usually the best for a smaller to medium sized startup that is not actively seeking venture capital funding. VCs generally favor Delaware corporations for flexibility in raising capital, and for other reasons explained below. But if you’re bootstrapping or have a small number of investors, and LLC is generally going to be your best bet.

Where?

When you form an entity, you need to make a decision regarding which state you will incorporate. Again, for a fairly standard business, your best bet is likely to incorporate in your principal place of business (PPB). This allows you to avoid the charge of having an outside party serve as your registered agent, and facilitates easy communication with your local Department of Commerce or other agency in charge of entities.

That being said, there are two other jursidictions that provide advantages to would-be incorporators: Nevada and Delaware. Nevada offers a number of important benefits that should be considered including: no state corporate tax, greater anonymity for owners and officer, potentially greater protection from personal liability, and excellent customer service. Nevada has actively sought to attract more companies and have been successful at using their corporate laws to do this. On the flip side, the greater anonymity and secrecy can be interpreted as a way to get away with something shady or cover your backside in the event the company goes down—not the type of image you will want to put forward to investors and potential partners.

Delaware has long been known as a popular place to incorporate. 63% of Fortune 500 companies have chosen Delaware as their place of incorporation for a variety of reasons. First, Delaware has a special court, called the Court of Chancery that only hears business cases. They tend to establish business law and have a reputation for being fair and business savvy. Second, the sheer number of corporations and established body of law leads to more certainty regarding the resolution of corporate disputes—something very important to venture capitalists and other investors. Thus, they frequently require businesses seeking investment to be Delaware C-Corps. But, for the average business, the costs will generally outweigh the benefits. Plus, in many cases it is not too difficult to arrange an asset purchase or other arrangement to change from one corporate form to another if necessary.

In summary, there is not really a simple answer to the question about how to best organize a company. Instead, a lot depends on the company’s goals, potential investors, number of partners, and other factors that have a large impact on which form is best. Of course, when in doubt, it’s always best to contact a knowledgeable attorney who can help guide your individual goals.