Getting Started: Forming Your Business

One of the first things you'll want to do is decide the entity type under which you will operate your business. Each entity choice has certain advantages, depending on the nature of your business operations. Let's discuss:

Sole Proprietorship: The easiest entity to set up, since if no registration with your state is completed, you are by default a sole proprietor. Sole proprietors own 100% of the business and are viewed as one and the same with their business. Tax liability falls directly on the owner, as does liability for all debts, damages, and lawsuit responsibilities. The benefit of this entity type is mainly the ease of setup. However, the risk of unlimited liabiliy is a heavy risk to consider as well.

Partnership: As the name implies, this entity is formed when two or more persons formally agree to form a business with each other through what is termed a "Partnership Agreement." Profits, Losses, Liability and Tax responsibilty is spread among each partner depending on the distrubutions of profits/losses and the partenership agreement in place. Personal liability is still a possibility with this type of structure, meaning that your personal assets could be called upon for restitution of damages in the event of a lawsuit.

Limited Liability Company (LLC): This entity can be made up of one person or several persons and is formed through registration with your state's Secretary of State Office. This entity also helps to limit, although not completely eliminate, personal liability for debts and lawsuits. Another benefit of this entity type is the option to select pass-through tax treatment for the company, meaning taxes on profits will not be triggered until distributed to the sole owner or partners within the LLC.

Corporation (Inc. or Corp.): This entity is also created through your state's Secretary of State Office. Corporations are recognized as separate legal entities from their owners, which creates limited liability against business loss and protection in the event of bankruptcy or a lawsuit. Corporations do not have pass-through tax treatment, meaning profits will be taxed at the corporation level (as the Corp. is treated as a separate person altogether), and again upon distrubution of profits to shareholders.

S-Corporation: This type of corporation offers the benefit of taxation only at the shareholder level, meaning taxation occurs only once, and is limited to companies who will only have 100 shareholders or less.

As you can see, there is a lot to consider in deciding which entity type is best for your business. Will you be distributing shares or hope to in the very near future? Will you eventually like to add one or two more partners to your business without having to change the business's entity structure? Are you looking to get set up as a business quickly with minimal initial and annual paperwork? These are the types of questions you'll need to consider before deciding upon a business entity. You may also want to consider speaking with a Lawyer, depending on the nature and scope of your business.

Whichever entity you choose, you'll also want to follow up with applying for an Employer Indentification Number (or EIN; also called a Tax Indentification Number). This number is similar to a Social Security number for your business and will help the IRS to identify your business for tax purposes. You can learn more about this identification number and apply here.

Once you've selected an entity type and have received your Tax ID, you'll be ready for the next step, setting up a Business bank account.