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Learn2 Choose a Business Entity
(7 steps)
Build your business on a firm foundation

Corporation? Sole proprietorship? Limited liability company? Even before your business is off the ground, you need to decide what its status will be--a decision that has huge legal and tax ramifications. And in a country with only 7 percent of the world's population and more than 90 percent of its lawyers, it's important to make the right choice.

Basically, it boils down to this: you need to decide whether or not to incorporate. By creating a corporation, you'll protect your personal assets from business debts and other liabilities as long as you follow certain requirements. On the other hand, you'll be subject to a whole new set of regulations that require a lot of paperwork. Your tax status will also change, which could save or cost you big money.

We'll explain how to untangle the rigamarole and pick the kind of business status that's best for your venture.

Before you begin

As you select a form for your business, remember you're not locked in forever. For the first couple of years, it may be simpler to remain a sole proprietorship, but as your company grows, the tax and liability advantages of incorporation may become worth the effort.

This 2torial provides a basic outline of the four major types of business entities: sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). We can tell you some of the advantages and disadvantages of each, but there's no single formula that will tell you which is correct for your business.

Make sure you consult a professional (see Step 8) who can answer questions about your particular situation. He or she may also be able to propose hybrid business forms such as professional corporations, nonprofit corporations, limited partnerships, and professional limited liability partnerships, which may have special advantages for your business.

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Step 1: Understand your options
Step 2: Understand the advantages of incorporation
Step 3: Understand the disadvantages of incorporation
Step 4: Consider the S corporation
Step 5: Understand LLCs
Step 6: Understand sole proprietorships
Step 7: Understand partnerships

A business name (plus alternates in case it's already taken)
A lawyer (or in-depth knowledge of business law)
An accountant (or in-depth knowledge of tax law)
About $100-2,000 (U.S.) or more, depending on what legal and accounting services are required