A legal business structure is essential to the smooth functioning and success of the business. Many small businesses are ignorant or unaware of the importance of having a proper business structure that protects the business owner from a business mishap that has the potential to wipe out hard earned assets within the matter of days. Operating a small business alone will provide the business with the status of a Sole proprietorship even if no legal formalities have been complied with. Likewise if two or more individuals engage in joint business or professional activities, the business assumes the nature of a Partnership. These forms are governed by the state rules and by default subject to the specific terms and conditions of the state.

The main issue with these forms is that the personal liability of proprietor or partner is unlimited towards business obligations. Which means that business owner’s personal property can be attached for settling all business obligations or debts. To overcome this unlimited liability problem, small businesses can form a Limited Liability Company or a Corporation. In both these forms, business owner’s personal liability is limited to their individual capital contribution to business. The business liabilities or debts do not crossover to the members or share holders.

For federal tax purposes LLC or Corp can file returns under different classifications. The C Corp files returns and pay taxes as a separate entity from that of its share holders. LLC or S Corporations have a pass through taxation where the members or share holders report their share of the profits or income through their personal returns. One difference in LLC Vs. S Corporation is that S Corp has to file other corporate returns required by the federal or state governments.

Small business incorporation is simple and straight forward in all states. States actively promote business in their territory and provide all support to small business to form and operate. Small business can approach the state agency responsible for small business incorporation directly, or engage the services of a professional for incorporating their business.

For more info also see llc vs s corporation.