Typecasting: What Will Your Business Be?For tax purposes,

Typecasting: What Will Your Business Be?

For tax purposes, the first thing you must decide when opening your virtual corporation is the type of business organization you will file under. There are three basic types of business entities in the United States: sole proprietorship, partnership, and corporation, which can be further divided into "C" and "S" corporations. The type you choose depends on the industry you're working in and the arrangement of your company's personnel (if any).

Sole Proprietorship. In a sole proprietorship, the owner and the business are interchangeable. You are the company. The owner of a sole proprietorship is completely responsible for all business functions and unquestionably controls every aspect of the company. In other words: it is a corporate dictatorship.

One of the advantages of a sole proprietorship is that it's the easiest and least costly to set up. The only requirement for this type of business is for you to declare, "I am a business, and this is my business name." However, it is helpful and favorably viewed by the government if you file a DBA (Doing Business As) certificate with your local county clerk's office-particularly if you plan to earn more than $600 a year with your company. Filing a DBA is a simple, inexpensive process. You will need the name you plan to operate your company under, an official photo identification such as a driver's license, and a fee of around $50 (fees vary from state to state; check with your local county clerk for specific fee rates). When you file your DBA, have a few variations of your business name ready in case the one you want is taken.

There are some disadvantages to sole proprietorships, particularly in the area of income taxes. The percentage of your income you will pay in taxes is roughly equal (somewhere around 20 percent) until your income passes a certain point-when the percentage for a sole proprietorship begins to rise, and can reach as much as 50 percent. For this reason, many businesses choose to start out as a sole proprietorship for the ease and low expense, and then make the move to a corporation a few years into operation.

Partnerships: A partnership is a company whose ownership is split evenly between two people. The best advice to those considering forming a partnership business entity is this: never form a partnership.

A partnership business entity lies somewhere between a sole proprietorship and a corporation in tax levels as well as the startup and filing costs associated with it. In a partnership, each partner acts as a sole proprietor, but neither partner can make decisions or take action without the consent of the other. If you must form a partnership, be sure to draw up an extensive legal agreement-with an attorney-to cover the following areas of concern:
* The type of business you are operating
* The amount of investment equity each partner will contribute, including cash, equipment, and supplies
* Division of profit or loss (usually 50/50)
* How long you intend the partnership to last
* How you will split the business assets in the event of dissolution
* How you will resolve disputes between partners
* Who is in charge of what (restrictions of authority)
* What will happen to the business in the event one partner dies or becomes incapacitated