Regardless of these precautions, partnerships are the most

Regardless of these precautions, partnerships are the most difficult business entity to manage and often the first to dissolve. Never form a partnership-unless you really, really have to.

Corporations. A corporation is the most costly and complicated business entity. However, for your virtual corporation it is often the best choice. In a corporation, control of the business is in the hands of the primary stockholder. Individual business owners can form corporations, because if there is no business stock, they are automatically considered the primary stockholder, as they have the greatest stake in the business.

The prime disadvantage of a corporation is the expense in setting it up. You should always engage a lawyer to handle the incorporation of your business, and legal incorporation fees can run anywhere from $200 to upwards of $1000, depending on the level of complication involved in setting up the corporation. If you are just starting out, you may not be able to afford the incorporation fees, and should therefore begin as a sole proprietorship with intent to incorporate.

The advantages offered by the corporation business entity are numerous. One is liability in the event of loss. With a sole proprietorship, if your business goes under then you as the owner are personally liable for all remaining financial responsibilities of the company. This means your creditors will be able to seize your personal assets if you are unable to pay. However, a corporation is maintained as a separate entity from the business owner, and your personal assets such as your house and car cannot be seized to fulfill financial responsibilities for the business.

Lower taxes are another advantage to corporations. Though the percentage of tax against your income does rise when your business earns more profit, it does not go nearly as high as that of a sole proprietorship. You're not likely to pay more than 30 percent of your income in taxes with a corporation, and generally it won't be more than 20 or 25.

Special considerations for incorporation of a virtual company arise when considering the state of incorporation. A common practice among businesses is to incorporate in a state with notoriously lax income tax laws, such as Nevada. However, this practice is generally far more hassle to you as a business owner than any benefit you might receive. You should discuss out-of-state incorporation with your attorney before considering it for your business.

C or S: What's That Letter Mean? Unfortunately, they don't stand for Complicated and Simple. There are two different types of corporations: the C corporation and the S corporation. Actually, the C corporation is less complicated; basically, with a C corporation all taxes are the responsibility of the primary shareholder (in other words: you, the business owner). S corporations are also referred to as "pass-through" corporations, because some of the tax burden passes through to individual shareholders.

This description may seem as though the S corporation is the better choice. After all, who wouldn't want to pay less in taxes? However, there are many regulations and restrictions on S corporations that make this model inefficient for the virtual business owner, and can actually work against you. Generally, you will be better off incorporating as a C corporation. You should consult a tax attorney who specializes in small business tax law to determine which incorporation entity is right for your company.