When you start a business, it is very important that you set up the proper legal structure for what you are doing. If you don’t, then you might find yourself sailing in the wrong boat. When you are sailing in the wrong boat, it is somewhat of a challenge to make your way to the right one.

So let us look at the different types of business legal structures that exist and what they are:

• Sole proprietorship – This is the simplest and most common of all of the legal structures. This is because this is a business that is owned by a single person and that person has unlimited liability. A person who provides services to another is a sole proprietor unless they decide to set it up as something else. So if you’re a contract sign dancer for restaurants and retail stores, you’re a sole proprietor.

• Partnerships – This is when two people decide to go into business together to make a profit. Each person owns a portion of the business and they also own whatever profit or loss that is made. So make sure you are going into business with someone who is in agreement or else you could see some trouble looming ahead. Some husbands and wives go into business in this way.

• Corporations – A corporation is set up through your state and your liabilities are limited. This means you are not personally liable for everything if trouble occurs. You do not become individually responsible for damages like you would through a sole proprietorship or a partnership. LLCs and S Corps are a part of this category. A corporation is considered a separate entity.

But wait. We need to look at this LLC and S Corp thing a little bit better. First of all, LLC stands for Limited Liability Corporation. The above definition more or less covers that. Your liabilities are limited. But what is an S Corp? Well, an S Corp is a corporation that is taxed under Subchapter S of the IRS’s Chapter 1. In other words, they do not pay income tax. Instead, they take income or losses and divide it amongst their shareholders. The shareholders then report the income or loss when it is time for them to file their taxes. So yes, the shareholders are fitting the bill.

So whichever one of these categories you fit in, it is important that you set yourself up accordingly. That way you can be taxed correctly, you will be held liable in the correct situations, and you are legally set up to do business the way you need to.