Structuring Your Business: A quick look at the tax implications of various business formations.

• Author: Whitesides, Hilary Ingoldsby
• Position: EntrepreneurEdge

There's a lot to consider when starting your own business, and how to structure your business should be at the top of your list. Tax implications--advantages and disadvantages--vary with each type of business structure, making the right choice an important step toward the success of your business.

While it's always best to consult with tax and legal professionals, here's a genera] and basic overview of the tax implications associated with the most common types of business structures.

Sole proprietor

For those who own a business by themselves, sole proprietorship may be the most straightforward and simplest type of business structure. According to the Utah Department of Commerce, sole proprietorship is the most common type of business structure, the least expensive to form and the simplest in terms of legalities.

In this type of scenario the owner, not the business, is responsible for all taxes, and taxes are filed on personal tax returns. The owner is also responsible for the company's liabilities, debt and any legal claim filed against it. According to Lynn G. Hillstead, CPA/ABV, CVA with Squire & Co., many businesses start as a sole proprietorship and then move into a different business structure as the business grows, more capital is needed or a different type of asset protection is desired.

Corporations

As opposed to sole proprietorship businesses, corporations are independent from owners. As such, their tax filings are often more complex, but liability lies with the business itself, which frees the owner's personal assets from risk. According to the Utah Department of Commerce, the majority of large businesses are classified as corporations.

C Corporation

While there are more facets to consider, the main thing to know about C Corporations is that they are subject to what many refer to as double taxation.

"Corporate profits are double taxable; once at the corporate level and again at the shareholder level, but only when those profits are distributed in the form of dividends or upon liquidation of the corporation," Hillstead says. If you're wondering why anyone would choose this type of business structure, publicly traded corporations must be structured and filed as C Corporations.

S Corporation

Like a C corporation, an S Corporation is a separate legal entity, but in this structure corporate profits and losses are passed onto shareholders thus avoiding double taxation.

"This means that the corporation, generally, does not pay...