One of the most important decisions entrepreneurs make is how to legally set up their businesses. The choice can be a wise move or a costly mistake with regard to taxes paid, protection from liability and the amount of resultant flexibility in running the operation. Factors influencing your decision about your business organization include:

• Legal restrictions
• Liabilities assumed
• Type of business operation
• Earnings distribution
• Capital needs
• Number of employees
• Tax advantages or disadvantages
• Length of business operation

The initial choice of a business form, even if it achieves optimum results in the start-up phase, may require adjustment or alteration as the business matures. It is important to periodically re-examine the appropriateness of the type selected. Below is a description, and a comparison of the advantages and disadvantages of each form of organization.

The advantages and disadvantages of sole proprietorships, partnerships and corporations are listed below.

A business may incorporate without an attorney, but legal advice is highly recommended. The corporate structure is usually the most complex and more costly to organize than the other two business formations. Control depends on stock ownership. Persons with the largest stock ownership, not the total number of shareholders, control the corporation. With control of stock shares or 51 percent of stock, a person or group is able to make policy decisions. Control is exercised through regular board of directors' meetings and annual stockholders' meetings. Records must be kept to document decisions made by the board of directors. Small, closely held corporations can operate more informally, but record-keeping cannot be eliminated entirely.

People usually incorporate to limit personal liability for the debts and liabilities of the business. However, officers of a corporation can be liable to stockholders for improper actions. Liability is generally limited to stock ownership, except where fraud is involved. It can continue to function even without the existence of original ownership or other key individuals. It also has advantages in terms of enabling employees to participate in various types of insurance and profit sharing. A corporation has more flexibility in terms of different approaches to taxation. Whatever form of incorporation you choose, be sure to consult an attorney for a full appreciation of your rights and responsibilities.

Advantages of Corporations:

• Limited liability for stockholders
• Continuity
• Transfer of shares
• Easier to raise capital
• Possible to separate business functions into different corporations
• Shareholders have limited liability for the corporation's debts or judgments against the corporations.
• Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership

Disadvantages of Corporations:

• More expensive to launch and maintain
• Gives owner a false sense of security
• Heavier taxes
• Power limited by Charter
• Less freedom of activity
• Legal formalities

Subchapter S Corporations
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return. The catch here is that shareholders, if working for the company, and if there is a profit, must pay themselves wages, and it must meet standards of " reasonable compensation."

Sole Proprietorships

For an individual who wants to keep the operation small and simple, this is the easiest, least costly and least regulated type of business to enter into. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.

Advantages of Sole Proprietorships:

• Easiest and least expensive to get started
• Greatest freedom of action
• Maximum authority
• Income tax advantages in very small firms
• Social Security advantage to owner of Sole Proprietorship
• Sole proprietors receive all income generated by the business to keep or reinvest
• Profits from the business flow-through directly to the owner's personal tax return.
• The business is easy to dissolve

Disadvantages of Sole Proprietorships:

• Unlimited liability
• Death or illness endanger business
• Growth limited to personal energies
• Personal affairs easily mixed with business
• Often limited to using funds from personal savings or consumer loans
• Some employee benefits are not directly deductible from business income

Partnerships

There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. Each partner is an "agent" for the partnership and can individually hire employees, borrow money and operate the business. A partnership is not a separate legal entity, even though required to report its income on a separate, informational tax return, but profits made must be included in each partner's individual tax return. Each partner is personally liable, just as in a proprietorship, for debts and taxes to the extent that personal assets can be subject to attachment and liquidation if the partnership itself cannot satisfy creditors' claims.

Advantages of Partnerships:

• Two (or more) heads better than one
• Additional sources of venture capital
• Better credit rating than corporation of similar size
• Profits from the business flow directly through to the partners' personal tax returns

Disadvantages of Partnerships:

• Death, withdrawal or bankruptcy of one partner endangers business
• Difficult to get rid of bad partner(s)
• Hazy line of authority
• Partners are jointly and individually liable for the actions of the other partners
• Some employee benefits are not deductible from business income on tax returns

Limited Liability Company
The LLC is a relatively new type of hybrid business structure permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

Publications Incorporating U. S. Government Works

Works aby the U. S. Government are not eligible for U. S. copyright protection. For works published on and after March 1, 1989, the previous notice requirement for works consisting primarily of one or more U. S. Government works has been eliminated. However, use of a notice on such a work will defeat a claim of innocent infringement as previously described provided the notice also includes a statement that identifies either those portions of the work in which copyright is claimed or those portions that constitute U. S. Government material.