SCORE

In developing your business plan, you need to decide which structure your business should operate under for legal and tax purposes.

Sole-Proprietor

Plan to report any business income on your personal 1040. Plan to also have full liability for the business -- your personal assets will be at risk.

Downside: This choice can be a disadvantage for long-term growth and raising capital.
 

C Corporation

For legal purposes, incorporating can limit any potential liability to corporate assets and thereby protect your personal assets. If filing as a C corporation, tax is due on any earnings at the corporate level. With this option, you are creating a separate legal structure allowing for certain tax-deductible business expenses.

Downside: One disadvantage is "double taxation." Your profits are taxed when earned and taxed again when distributed as shareholders' dividends. Shareholders also cannot deduct any corporate losses.
 

S Corporation, LLC or partnership

A corporation can elect to file as a Subchapter S corporation where earnings and losses flow through to the shareholders' personal tax returns. This is known as "pass through taxation." It also applies if a business is organized as an LLC (limited liability company) or partnership. Both corporations and LLC’s provide a good measure of personal liability protection.

Downside: Partnerships are like sole proprietorships from a liability standpoint.

Whatever your decision, you typically need to file paperwork to register your business and then to report on operations each year.