Aside from determining your market and product, two of the most important considerations when starting up your business and deciding whether to incorporate or not are: liability and taxation. While there are several types of business structures to consider, it's important to decide which one provides you with the level of personal liability and taxation you're comfortable with.

Here's a general guide to help you make that decision.

Sole Proprietorship:

A "sole proprietorship" is a business owned and run by one person.

And in the U.S., most small and home businesses are sole proprietorships. You may be required to apply for general licensing and permits, or a license for a professional or occupational business, but sole proprietorships aren't required to file any special forms to create one.

Technically, you are "Mary Jones, DBA (Doing Business As) Widgets Plus". Should you decide to be known only as Widgets Plus, you would then apply to the office of the Secretary of State, in your state, for a "fictitious or assumed name" for your business. Then customers will know your business simply as Widgets Plus.

Sole proprietors take full responsibility for their business, including liability and taxation. Depending upon the type of insurance you have - property loss, product liability, personal injury - people can sue you. The U.S. Internal Revenue Service (IRS) does not treat you as an employee of your business. So money from sales and assets sold or owned by you, is taxed to you personally. You can deduct most business expenses and costs of doing business when you file your annual personal tax return.

Limited Liability Company (LLC) or Limited Liability Partnership (LLP):

As a Limited Liability Company (LLC), you can run your business alone, as a sole proprietor does. Yet still have some liability protection as a corporation does. An LLC structure helps protect personal assets, such as your home, against business loss. It's simple to set up and maintain.

With an LLC, you'll also get the tax flexibility of a sole proprietorship, with business income passing through to you as personal income. Any business expenses can be deducted from your annual personal tax return.

In a Limited Liability Partnership partners are limited to the legal liabilities for debt to which the partnership owners are exposed. However, they do not protect professionals, such as lawyers or doctors, from malpractice claims.

Ownership depends upon decisions made when the partnership is set up. For example, the developer of a business may own seventy-five percent, a partner twenty-five; each taxed on the percentage owned. Laws vary from state to state in the U.S., but closely follow rules set for General Partnerships. Hire an accountant and a lawyer with experience organizing and setting up partnerships.

"S" Corporation:

An "S" Corporation is similar in structure to an LLC. It was developed for small businesses and home based businesses. To give them some of the same personal liability protection as a corporation, without requiring them to incorporate. However, in some states, home based businesses get fewer benefits than those of an LLC. Check with your state and a lawyer specializing in the set up of corporations.

"C" Corporation:

A corporation is a separate and distinct structure from it's owners. The corporation owns all: assets, income from sales or investments, property and anything else considered for tax purposes as an "asset". It's also responsible for all debts and obligations incurred; can sue and be sued; has tax reporting requirements and may be required to pay taxes; must have a record keeping system; must have it's own bank accounts.

A small or home based business can also incorporate. If there's only one owner that individual would hold two corporate positions, (say - president and secretary), although all other rules of incorporation apply. Family members, who've organized a business, may also opt to incorporate shielding them from personal liability. While corporations protect owners from most liabilities, owners are personally liable for such things as fraud.

In a "C" corporation, usual decision-making requirements generally rest with the board of directors, which manage it's affairs. Shareholders elect the board of directors. A corporation can issue stock, and there's no limit to the number of people who can own stock. Plus, corporations can be "publicly traded". The rules set by the Securities and Exchange Commission of the U.S. determine how that corporation can sell stock, and to whom.

Corporations have tax reporting requirements and may be required to pay taxes on corporate profits. There are specific tax forms to be filed, apart from any personal tax filings individual owners make.

The Internal Revenue Service assigns "Employer Identification Numbers" (EIN), to identify the tax accounts of most corporations, partnerships and employers. Whereas sole proprietorships are identified by their personal U.S. Social Security number.

A corporation must have Articles of Incorporation and By-Laws, to file reports and documents required by the state in which it resides. It's a complex situation best left to an experienced lawyer.

Professional Corporation:

Most states limit the structure of Professional Corporations to licensed individuals of the same profession. For instance, doctors and lawyers. While this structure allows these individuals to practice in a group, it also gives them the same liability protection as other corporations, with the following two exceptions: (1) It must be organized for the sole purpose of rendering professional services; (2) each individual member is personally responsible for their own acts of negligence.

General Partnership:

In a General Partnership, each partner owns a percentage of the business, making them each an owner. As with LLP's, the percentage each owns is designated in the original partnership agreement. Each partner works and shares equally in any decision making, and the running of the business. With income and losses passing down to partners as it does in an LLP. (The business - itself - is not taxed.) However, Form #1065 (U.S. Partnership Return of Income) must be filed.

Regarding liability: insurance, and a well written partnership agreement, help shield the partners. Bottom line - each partner is equally responsible for the full amount of business debt, whether consenting to it or not. Since organizing a General Partnership is somewhat complex, and includes the filing of forms similar to those of corporations, it's wise to have an accountant and a lawyer set it up.

A Reminder:

These are guides and general descriptions of each type of business structure. Each may also have other specific regulations and requirements determined by the state in which your business will reside and should therefore be checked before taking what you read here as gospel. With the exception of a sole proprietorship, all others need the expertise of an accountant and experienced lawyer to set it up.