Law & Taxation mentor Barbara Weltman responds:
As the sole owner, your choices are limited to sole proprietorship, S corporation, and C corporation (and limited liability company if your state recognizes a one-member LLC). To decide among the choices open to you, consider the following factors:
- Personal liability protection
- How profits are taxed
- Opportunity to take advantage of fringe benefits
- Ease in raising capital
While a sole proprietorship is the easiest to set up (you generally don't need to take any legal action), you have unlimited personal liability, so you may prefer a different type of organization. Since the nature of your business involves people at a party, the opportunity for injury suggests that you consider a form of business that provides you with personal liability protection, e.g., an LLC or corporation.
With a sole proprietorship, S corporation, or LLC, all business profits are taxed to you as an individual (whether or not you take money from the business). However, only a C corporation can take advantage of certain fringe benefits for an owner. If you need outside capital, a corporation may make it easier to attract investors.
You can, of course, change the way you do business as the company grows. For example, many businesses start out as sole proprietorships and later incorporate. Before deciding how to organize your business, be sure to talk with a tax professional. He or she can help you review in more detail your personal situation and advise you on the best strategy for your business.
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