Once you decide to start a new business, and before actually commencing operations, you need to choose a legal structure that best suits your circumstances. The structure is basically how you register the business, or more specifically, the type of ownership that you require. According to the IRS, there are five different types of business structures in the US which include Sole Proprietorship, Partnership, Limited Liability Company (LLC), C Corporation (Inc and Ltd), and S Corporation. Selecting a business structure will require reviewing each scenario to determine which is best for your purposes.

Generally speaking, the type of business structure chosen will depend on decisions made regarding tax implications, risk and accountability, whether there is more than one person who will own the company, shareholders, and whether you will hire employees. Sole proprietorships are the easiest to form and are the cheapest. They also provide the most flexibility for new owners, as they make all their own decisions. Tax-wise, owners are permitted to file their documents together. The profit and loss statement of the company becomes part of the personal income tax, which is a benefit if the owner also earns money elsewhere. But, sole proprietorships also hold the most risk in terms of being held personally accountable for debt and wrongful doing. For example, a creditor can seek a claim against one's home and other assets if a bill is not paid. Further, if an employee is hurt on the job, the owner may be personally responsible.

Partnerships are much the same in that they are easy to form and are inexpensive to start up. Each partner files her own personal income tax based on the information return provided to the IRS. The amount of taxes, for which each is responsible, will be dependent upon the percentages of ownership. Like sole owners, partners can be personally responsible for decisions made, and creditors can attach themselves to other assets. One area that is of major concern when starting a partnership is that all partners are responsible for each other's decisions. In other words, it only takes one partner to obligate the whole company to a contract. Likewise they are all responsible if one member incurs debt on behalf of the company. And if the partners have personality conflicts, things could get quite precarious, jeopardizing the health and life of the business.

An LLC provides tax advantages similar to the sole proprietorship, but also benefits from protection in the form of limited liability much like a corporation. In the beginning, the owner or members decide how they want to be taxed. The structure can be set up where the company is taxed as a corporation, or each can file individual tax returns. The key is to understand the full ramifications of the decision up front because the structure cannot be changed every year depending on how it benefits the members. Generally speaking, there are restrictions to changing the income tax structure.

The C corporation is usually quite involved, requiring shareholders and a Board of Directors. It is a separate entity from the owners. It has its own tax structure, and the corporation is held liable separate from its owners. In most instances, it is costly to incorporate. Once approved and completed, the company does business as an INC (incorporated) or LTD (limited) company. Legally, there is plenty of paperwork associated with this type of business structure. For example, records of the minutes of meetings must be kept, and meetings must be held at least once per year. Corporations can be defined as both for-profit and not-for-profit endeavors.

The S corporation can also be INC or LTD and is exactly the same as the C corporation structure. The difference between the two is the tax status. Unlike a C corporation where the business itself pays taxes, the individuals or shareholders in an S corporation pay their respective taxes based on the informational return. The income filters down to the owners.

Lastly, some states have their own business structures which are permitted under the law. But each has its own set of restrictions, and not all recognized are by the other states. These might include a Limited Liability Partnership (LLP), Professional Service Corporation (PS), Limited Partnership (LP), and Non-Profit Corporations. As you can clearly see, it is crucial to understand each setup when selecting a business structure. It is not that easy to make changes later. You need to have a firm idea of what your business will be, and the direction in which it is supposed to move. This also shows the need for a good accountancy firm and a business lawyer.