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