Selecting a Business Type
There are 5 basic business types Sole Proprietorship, General Partnership, Limited Partnership, Corporation and Limited Liability Company. Each business type is controlled at different levels, has different degrees of liability, different methods of taxation, and differing administration requirements. The first business type for discussion is the Sole Proprietorship.

Sole Proprietorship
A sole proprietorship business entity is the most common. There is very little to be done to be a sole proprietor. Basically you only have to purchase a business license in the city or county within which you reside. If you live within city limits, you must file your business with the city - otherwise, file with the county. Business licenses are usually around $35 per year.

If you want to establish your business in a name other than your own, you must file as a DBA (doing business as). There are additional annual fees associated with being a DBA. The purpose of the filing is to protect the public from unscrupulous business owners who do bad business and then disappear. At least, that's our opinion. Of course, you plan to be around a long time. So filing won't bother you a bit.

The individual who directs the affairs of the sole proprietorship is the sole proprietor - you. The sole proprietor also is personally responsible for all the acts of the business. Your personal assets are at risk from all business dealings. Taxes are reported on the sole proprietor’s personal tax forms. There are no recordkeeping requirements on a sole proprietorship although it is wise to keep an accurate account of all business financial dealings. State registration is not required.

The sole proprietorship is the simplest form of business to begin and maintain. It also carries the most personal liability. The general partnership is the next type of business we will discuss.

General Partnership
The general partnership business entity is the result of two or more persons who start a business as co-owners. A Partnership Agreement is signed by all partners so that everyone involved knows what is expected of the partnership. A general partnership is similar to a sole proprietorship except there are two or more persons involved. All partners share in unlimited liability with their personal assets on the line. Again, business licenses must be obtained. A business name must also be selected - since all partners will not have the same name. Profits and taxes are shared according to the partnership agreement. The partnership agreement also defines the controlling partner to avoid management decision divisions. Taxes once again "pass-thru" to each partner’s personal tax return. State registration is not required.

A general partnership is much more complex than a sole proprietorship. Liability is still high. The next business type to discuss is the limited partnership.

Limited Partnership
A partnership agreement is also required for a limited partnership business entity. In a limited partnership there are general and limited partners. The general partners are personally liable for all business dealings. The limited partners share in the profit but are not personally liable for the business. Limited partners participate in controlling the business. The general partners may bind the partnership to perform while the limited partners may not. To limit liability, many limited partnerships have a corporation as the general partner. Taxes pass-thru to each partner’s personal tax statement. Limited partnerships must file with the state but recordkeeping requirements are minimal.

The limited partnership is more complex than both the sole proprietorship and the general partnership. Liability is high for general partners but nonexistent for limited partners. The next business type is the corporation.

Corporation
A corporation is a separate legal entity - just like being a separate person. Unlike a person, a corporation exists forever. A corporation must be formally dissolved to end its existence.

A corporation is composed of shareholders, directors and officers. The shareholders control the activity of the corporation. Directors are hired by the shareholders. The directors hire officers. The officers conduct the daily business of the corporation. One person may be shareholder, directors and officers of the corporation.

The best reason to incorporate is to enjoy the limited liability. The corporation is liable for its activities, not the shareholders or officers of the corporation. Personal assets are also protected under a corporation.

It is very, very, important to keep personal and business finances separate under this type of business. For that reason it is paramount to have a business checking account.

Corporations are subject to double taxation unless a "chapter S" status is filed with the Internal Revenue Service (IRS). Double taxation means that the corporation is taxed and then the persons who are paid by the corporation are taxed again. S corporations are not taxed. The tax liability passes thru to those who are paid by the corporation. Most small corporations qualify for S status. Most large corporations do not.

There is a fair amount of recordkeeping and tax filing associated with a corporation. Limited liability is certainly a strong consideration here. If you file your own taxes and don't mind dealing with the government, this may be the best way to go. Many people hire an accountant and a lawyer to setup and maintain a corporation - but the liability for their decisions still rests on the corporation. There is also the high cost of paying a lawyer and accountant. We prefer to maintain our own records. It takes very little time and the government is very helpful when asked for advice.

Limited Liability Company (LLC)
A LLC is a cross between a partnership and a corporation. An LLC provides pass through taxation and limited liability. An LLC is owned by one or more "members". An LLC is perpetual - just as a corporation. Just as a corporation, articles must be filed with the state. Unlike a corporation, an LLC must have an operating agreement - like a partnership. Record keeping requirements are similar to a corporation. An LLC must choose to be taxed as a corporation or a partnership. Members risk their investment capital in the LLC and share profits. The costs associated with forming an LLC are similar to forming a corporation.

Conclusion
The sole proprietorship is the simplest and most cost effective to form but carries the most liability. Partnerships are formed by two or more people, have more extensive recordkeeping requirements and still encounter liability. Limited liability companies (LLC) are a cross between partnerships and corporations. LLC's have less liability; have two or more members and extensive recordkeeping requirements. Chapter S corporations have extensive recordkeeping requirements (like LLC's), the least amount of liability, and enjoy the least amount of taxation. For many contractors, a corporation is the best choice. In particular, a sub-s corporation may be a great choice.