How Should You Structure Your Business?

The liability aspect involves whether you as the business owner are responsible for the debts and actions of your company. In companies structured as sole proprietorships or general partnerships, you are responsible for the business's debts. In the cases of LLCs and corporations, you as the owner have little or no liability for the debts of the business.

Corporations are set up as separate entities and as such can own property, enter into contracts, and incur debt. Because the corporation is a separate entity, you are not generally responsible for its debts or any lawsuits that might be filed against it.

One of the main problems of traditional or C corporations is that the IRS taxes them first on their corporate profits and then double taxes them by taxing the income of the shareholders. S corporations get around this problem by only taxing the income of the shareholders. Companies wanting S corporation status must conform to certain regulations, such as having at least one shareholder and not more than 100 shareholders. In addition, the corporation has to file Form 2553 with the IRS.

Sole proprietorships, partnerships, and LLCs are taxed the same way as S corporations, meaning they are taxed once on the individual level. Sole proprietorships and partnerships are also liable for a self-employment tax, which, in the case of a partnership, has to be paid by each partner. Limited partners are only obligated to pay self-employment tax on payments for services rendered to the partnership. A shareholder-employee of a corporation is immune from self-employment tax, but instead is required to pay unemployment tax.