The easiest way to be in business for yourself is as a “sole proprietor.” This means you are the owner of a one-person business. There are very few steps one must take to form a sole proprietorship other than getting a business license and applying for a sellers permit if required. The major draw back to sole proprietorship is that the owner is 100% personally liable for all business debts and legal claims.

A “C” corporation is another name for a regular for-profit corporation, which is taxed under normal corporate income tax rules. A corporation can have as many or as few shareholders as it wants and the corporation provides all of its owners with the benefits of limited liability personal protection. The Corporation itself is taxed separately from its owners. This means that corporate owners pay individual income taxes on the salary amounts they received, not on all the net profits of the business. The corporation pays corporate taxes on the net profits retained in the business.

An S corporation is a corporation that qualifies for special tax treatment under the Internal Revenue Code. Forming one requires the same paperwork as a regular C Corporation with one additional step: shareholders will elect to treat the corporation as a flow-through entity. This is accomplished by filing IRS Form 2553. Generally, an S corporation may not have more than 100 shareholders who must be U.S citizens or certain types of trusts. S corporations also enjoy personal limited liability from the debts and liabilities of the corporation. Profits and losses pass through the S corporation and are reported on the individual tax returns of the shareholders. This means that any profits retained at the end of the year are not taxed at corporate tax rates but rather are passed through to the owners.

A limited liability company (LLC) is a unique business structure. LLCs combine the pass-through taxation of a partnership or sole proprietorship and also create limited personal liability for its owners, the same legal protection the owners of corporations enjoy. LLCs are available for most types of businesses and also allow for a flexible management structure as well as flexible distribution of profits and losses.