No matter which type of structure you choose, it can have far reaching ramifications for your business, ranging from how much you pay in taxes to how much legal liability you are exposed to.

The first choice you have to make is whether or not to incorporate. That decision will be influenced by how complicated your business is, whether or not you plan to hire employees, how much money you expect to generate in sales, where you are located and other factors.

One of the strongest arguments in favor of incorporating your business is that it protects your personal assets from debts and liabilities incurred by your company under most circumstances. Incorporation may also affect how much you pay in personal taxes, either increasing or decreasing that amount. Businesses that are incorporated are subject to more rules and regulations than unincorporated ventures; and that, of course, means lots more paperwork and administrative headaches.

Many first time business owners choose to start out as sole proprietorships, the simplest type of business entity. Companies have the right to change their structure, however, and a sole proprietorship retains the option of restructuring as a corporation at a later date as the business grows and becomes more complicated.

There are four basic types of business entities, although they may vary somewhat from state to state. As mentioned above, the simplest is the sole proprietorship. Other options include partnerships, corporations and limited liability companies, or LLCs. Each comes with, its own pluses and minuses, but the right choice for any particular business will be dictated by .its individual circumstances.

Your type of business structure can affect taxes, legal liabilities and much more.

A sole proprietorship is almost always a safe choice for a very simple business in which the owner is also the only employee. Still, it makes sense to discuss your plans with an accountant, lawyer or other professional specializing in this area before you make your choice. They also will be able to advise you about specialized business structures such as limited partnerships and nonprofit corporations that might make sense for certain types of ventures.

The process of incorporation basically structures your business as a stand alone entity totally separate from you as an individual. From a legal and regulatory perspective, a corporation might be described as a "virtual citizen." It has rights and responsibilities. It can conduct financial transactions such as borrowing money. It can incur liabilities both to other corporations and to individuals. It must pay taxes on any income it generates.

THE CORPORATE WALL

In effect, a corporation sets up a wall between the business entity and its owner or owners because it is responsible for its own debts and other . obligations. As long as certain requirements are met, owners of the corporation or shareholders are protected from losing. any assets other than those they have invested in the business. In other words, the debts of the corporation do not automatically become the debts of the owners.

A corporation can have a single shareholder, a handful, or a great number. Corporations with many shareholders are more likely to be public companies, meaning the company's shares can be bought and sold on the open market. Private corporations generally have a relatively small number of shareholders, and often there are restrictions on how shares may be transferred among them or to out side investors.

There are two types of corporations that have particular appeal to small businesses, Subchapter S corporations and LLCs. Both types of business entities offer shareholders some level of protection against debts and liabilities incurred by the company, often while providing significant tax advantages. The regulations governing which companies are eligible for S corporation or LLC status are fairly stringent, and these entities engender substantial administrative compliance requirements.

A sole proprietorship is the most "hassle-free" approach to structuring a business, and simple partnership among two or more people is similarly straightforward. The tradeoff for the lighter administrative load is personal liability on the part of the owner or one or more of the partners for debts and liabilities incurred by the business. Sole proprietorships and partnerships are not taxed on income, which can be an advantage for some business owners in certain situations.

A corporation can be seen as a kind of "virtual citizen" in many important respects.

The protection from business debts and liabilities afforded by incorporation is strong but not ironclad, especially if the owner or owners are not discriminating about keeping their personal finances separate from those of the business. Paying household expenses with a corporate checking account, for example, can weaken that protection.

Still, it offers much greater protection of personal assets than a sole proprietorship, which provides virtually none. A sole proprietor or partner remains personally responsible for all business debts, and creditors can and do come after personal assets if the business fails to meet its obligations.

Corporations, sole proprietorships and partnerships all are allowed to deduct business expenses for the purpose of determining taxable income, but corporations provide the most flexibility and the greatest range of benefits.

The list of expenses that are deductible for corporations is extensive, including, but not limited to, group health and life insurance, employee education and training, and daycare for children of employees. Sole proprietorships and partnerships, in contrast, generally are not permitted to take tax deductions for those items.

Another important financial consideration is the issue of double taxation. Incorporated entities are required to pay taxes on profits. When the remaining profits flow through to the owner or shareholders, they are taxed again.

TAX LOOPHOLES

There are legitimate ways for corporations, especially smaller enterprises, to minimize the impact of double taxation. For example, the bulk of profits can be directed to increased salaries for the company's officers, who are usually also its shareholders. Revenue can also be distributed as bonuses.

Record keeping responsibilities are another important consideration when choosing a business entity. The regulations governing. corporations on this matter are much stricter and more complicated than those covering sole proprietorships and partnerships.

While there are some Federal regulations that apply to all corporations, many rules lie in the domain of the individual states, as mentioned earlier. Failure to comply with all record-keeping requirements can compromise the protection otherwise afforded investors by incorporation. The expense and effort involved in that record keeping should weigh in your decision.

One compromise alternative that appeals to many entrepreneurs is the S corporation, which was created by the Tax Reform Act of 1986. The legislation enabling S corporations set strict guidelines governing them, but the benefits are substantial. In a nutshell, while shareholders in an S corporation have a substantial level of protection against liability, the corporation is taxed like an individual, that is, no double taxation.

A sole proprietorship is the most "hassle-free" approach to structuring a business.

S corporations are limited to no more than 75 shareholders, all of whom must be U.S. citizens or legal residents. They must be actively engaged in business, generating at least three quarters of their income from making or selling products or performing services, as opposed to passive income from investments.

Another attractive alternative for some small businesses is the limited liability corporation. LLCs are state created entities, unlike the S corporation, but they have much in common with the latter. Shareholders are protected from corporate liabilities and double taxation, but in most states an LLC must have more than one shareholder.

A sole proprietorship does not have to go through formalities of licensing and registering with the government that a corporation must do. In conducting its business, the sole proprietorship simply has to comply with all federal, state and local laws and regulations that apply to what it does.

One of the big advantages of this business entity is that it allows the owner to make instantaneous management decisions without consulting anyone else. That can be important for a very small business that has to react to changing market conditions quickly.

The corporate shield against liability is not available in the sole proprietorship format.

Every silver lining has its cloud, of course, and sole proprietorships are not exception to that rule. As a sole proprietor, you have no corporate shield to protect you against liability, including any debts or liabilities you incur as a result of actions related to your business. If your business has debts but does not have the resources to pay them, creditors can take action to seize your personal assets cars, jewelry, household furnishings, even your home.

The sole proprietor really is a solo player in the business world. Unlike a manager in a corporation, he or she does not have a board of directors or other company managers to tap for help, advice or expertise. Many sole proprietors also face more difficulty in raising financing than they would if their companies were incorporated.

Unincorporated general partnerships are similar in many respects to sole proprietorships. The major difference is that ownership, responsibility and personal liability are shared among two or more partners.

Partnerships can be structured so that unlimited liability for the company's debts rests with just one partner, in which case the other owners become limited partners. Their. liability is then limited to the amount of their original investment in the company. In most cases, however, such limited partnerships are treated as securities, entailing additional regulatory issues and legal filings.

If you are considering partnership as a business entity, it is important to take an honest look at the personality issues involved. Running a business entails many different things, a lot of which revolve around money. Just because you are friendly with someone in other areas of your life, there is no guarantee that the two of you will get along well as business partners. Partnership, like marriage, is not something to rush into.

WRITTEN AGREEMENT

Partners share in the business's profits, of course, usually to the degree that they have invested in the business's start up. Money, however, is not all partners share. As owners of the company, partners have a say in how it should be run. If they are general partners as opposed to limited partners, they also share in potential liabilities.

Because partner relationships can be so. complex, it. is important to spell everything out in a written agreement at the start of your new business venture. The agreement should clearly state how and when profits will be disbursed, who is responsible for what in running the company, and how any disagreements will be resolved.

A partnership can be a , very effective form of business entity. Two heads often are better than one. Partners can support each other through trying times and bring two different perspectives to solving problems. Each partner may bring strengths in different areas to the business, so their respective talents can complement each other. Likewise, partners may have reservoirs of expertise in varying fields.

It is important to get a written agreement covering all the key aspects of a partnership.

Just as importantly, a partnership can double or triple the financial resources available to a startup venture, since each partner contributes. Raising enough capital to start the venture and make it through the first year of business is the biggest challenge faced by most new entrepreneurs. Being able to share that burden can lighten it significantly.

There is a lot to consider when choosing the entity you will use to structure your new business. But there is a lot at stake, too, so take the time to consider all the variables and get professional help in whatever areas you need it.