Practical Suggestion: If you are just testing a business idea or concept, it may be okay to start as a sole proprietor or partnership for a short time until you know if the project is going to work. However, keep in mind that if you get sued during the time you operate as a sole proprietor, even though you may incorporate or form an LLC later, you will have no liability protection for events which occurred before you formed the entity.

It has been suggested that the liability treatment of S corporations (which are treated just like regular C corporations for liability purposes) is more predictable than LLC’s because they have been available for many more years than LLC’s and have a substantial body of legal cases which act as precedents in determining issues of liability. LLC’s are relatively new and there are fewer legal cases to help predict issues of liability.

Both S corporations and LLC’s are pass-through entities for tax purposes. The entities file an informational tax return but the individual owners, which are called shareholders in an S corporation and members in an LLC, report income and/or losses on their individual tax returns.

There are some differences in the way basis is determined for the purpose of determining losses. A discussion of tax basis is beyond the purpose of the book but can be discussed with your tax advisor.

Just keep in mind that if you are expecting substantial losses in the early stages of the business or if you are borrowing substantial sums of money for your business, the LLC may allow you to write off greater losses than you could if operating the business as an S corporation.

The most basic and simple form is the sole proprietorship, which involves business ownership by one person or in some cases by husband and wife. Other forms include a partnership, limited partnership, regular or C corporation, S corporation, Limited Liability Company (LLC) or Limited Liability Partnership (LLP).

Corporations have sometimes been called legal fictions, meaning they exist only because the state law authorizes their existence. Corporations were first authorized by state laws to provide a form of doing business where a person could invest money in a business venture without subjecting their personal assets or property to liability.

Corporations are considered legal entities, separate and apart from the shareholders or people who own them. Thus, if a corporation is sued and the court rules against the corporation, the law allows the judgment holder to satisfy the judgment (get paid) only from the assets or property of the corporation and not the private property of the individual shareholders.

This corporate attribute is called limited liability protection. In a sole proprietorship or partnership, a judgment can be satisfied from the personal property of the individual owners of the business if there are insufficient business assets to satisfy the judgment.

Not only do corporations owe their existence to state law, but they are also governed and regulated by the corporate laws of the state in which they are incorporated and/or in which they choose to do business.

Note: If a corporation sells stock, it may also be regulated by state and federal security laws.

The corporation laws for many states can now be found online. If you need to review the corporate law in your state, the following sources may help.

For more information on state laws visit:
http://www.findlaw.com/11stategov/or/laws.html