Final answer:
Small business owners typically consider double taxation and liability protection as crucial factors when choosing a business entity, with structures like LLCs and S corporations offering benefits in these areas. The correct options are 1 and 3.
Step-by-step explanation:
Among the factors small business owners consider when deciding on an entity type, double taxation and liability protection are usually key drivers. Double taxation refers to the tax structure where a corporation's income is taxed both at the corporate level and again at the individual level when distributed as dividends to shareholders.
This can discourage entrepreneurs from choosing a regular 'C' corporation as a business entity. In contrast, structures like sole proprietorships, partnerships, and S corporations avoid this issue by providing pass-through taxation, where the business income is only taxed once on the owners' personal tax returns.
Liability protection is also a significant concern as it determines the personal risk to business owners if the business incurs debt or legal issues. While sole proprietorships and partnerships offer ease of management and tax simplicity, they do not provide liability protection. This is where structures like corporations and Limited Liability Companies (LLCs) become advantageous, as they offer owners protection from personal liability for the debts and actions of the business.
As a result, when deciding upon which business entity to form, small business owners often favor options that minimize tax burdens and provide adequate protection from personal liability, making option 5, double taxation and liability protection, the correct answer.