You must decide what type of entity your business will be. Your business structure determines which Federal tax forms you file, and also influences how your business liability, Social Security contributions, deductions, and other issues are handled.

There are advantages and disadvantages to each type of business structure. Which one you choose depends on your income and financial obligations, how many employees you have, how your business operates, and other considerations. Consult a tax professional and/or a lawyer who is knowledgeable about small businesses for advice on how to structure your business to get the most tax benefits.

Types of Business Structure

Sole Proprietorship. If you are in business by yourself or with your spouse, you will most likely choose this simple business structure. On the upside, a sole proprietorship is easy to operate and gives the business owners the most flexibility and control. Keep in mind that as the business owner(s), you are personally liable for any debts or legal problems incurred by the business.

Limited Liability Company (LLC). In an LLC, partners share profits, losses, and management of the business, and agree to contribute funds, labor, and skills to running it. However, in this type of structure, one partner does not have personal liability for the negligence of another partner. Limited partners may be shielded from experiencing losses greater than their initial investment, but they often also have little say in the day-to-day running of the company, while general partners may take on both more responsibility and liability.

Cooperative. A co-op is owned by its members. The people who purchase goods or services from the cooperative make the business decisions, and the members elect their own board of directors from within the group. Profits are distributed among members equally or in proportion to their use of the co-op, rather than being based on ownership or investment. A co-op must pay taxes on income it keeps for investment or cash reserves. Member pay taxes on the income they receive from the cooperative.

Corporation. In legal terms, a corporation is considered a separate entity from the people who run it. This means it has rights, privileges, and liabilities beyond the individuals who run it. Structuring your business as a corporation may give you a tax break or yield other financial benefits, but it also removes control from the business owner. Corporations can be either for-profit or nonprofit.

General Partnership. Two or more people (usually not a married couple), agree to dedicate funds, labor, knowledge, and skills to starting and running the business. Each partner takes equal responsibility and shares in profits, losses, and management. Partners are also equally liable for business debts. Partnership terms are determined and formalized in a written agreement.

S Corporation. These types of corporations pass business income, profits, losses, deductions, and credit through to shareholders. Holders of S Corporation stock report income and losses on their Federal tax returns, allowing S corporations to avoid getting taxed twice on corporate income. According to the Internal Revenue Service, your business must meet the following requirements to become an S corporation:

• It must be based in the United States.
• Its shareholders must meet certain requirements, and may not include partnerships, corporations, or non-resident aliens.
• It must have fewer than 100 shareholders and offer one class of stock.
• Certain financial institutions, insurance companies, and international sales corporations do not qualify for S corporation status.