          
          
          
                           FORMING YOUR BUSINESS
          
               You can conduct business in one of three legal
          forms:  a sole proprietorship, partnership, or
          corporation; and in many states a fourth form -- the
          limited liability company.  Each has its charms and
          drawbacks.
          
          The sole proprietorship
          
               As business setups go, this one is the simplest. 
          A sole proprietorship is a one-person concern that is
          not closely regulated by state or federal governments. 
          All net income from the business counts as personal
          income on your tax returns.  Also, all liabilities of
          the business are personal liabilities, so there are
          risks. 
               This is a good way to start a business, since you
          may be able to deduct your home office, transportation,
          supplies, professional dues and publications, and many
          other expenses.  But you cannot deduct most employee
          benefits, such as life and health insurance.
          
          Partnership
          
               This arrangement -- often consummated when someone
          with an idea joins someone with capital -- is similar
          to the sole proprietorship in that the owners are
          personally liable for the activities and debts of the
          business. 
               Profits are considered personal income for the
          partners.  When you take on a partner, you can be held
          personally liable for any debts he takes on for the
          company -- even if you don't approve them.
          
          The corporation
          
               You can incorporate even if you are the only
          employee of the business.  A corporation is a little
          more costly than a partnership or proprietorship.  It
          must register with the state, pay an annual franchise
          tax, file annual federal and state corporate tax
          returns, and follow other procedures. 
               The corporation is a separate entity from you. 
          All transactions between you and the corporation must
          be handled in a professional manner.  You must strictly
          document cash receipts and expenditures and handle all
          personal transfers properly.  When you're incorporated,
          the IRS no longer considers you and the business to be
          "one pocket," so there may be tax consequences to some
          personal business transactions. 
               But the corporation still offers enormous
          possibilities for income splitting, accumulating
          earnings, and getting tax-free fringe benefits.  (More
          on these below.)  And because the government treats you
          and the corporation as separate entities, your personal
          assets are usually protected from creditors and legal
          settlements. 
          
          The limited liability company
          
               A new form of business entity, combining the best
          features of the corporation and the partnership, is now
          available in many states.  A limited liability company
          has corporate limitation of liability, but the tax
          transparency of a partnership.  Formation costs are
          usually similar to, or less than, corporate formation
          costs.  In some ways it acts like a Subchapter S
          corporation, by passing through the tax advantages, but
          it is more flexible than the Subchapter S corporation
          because there are no restrictions on who may hold
          shares in a limited liability company.  It can have a
          mixture of owners -- individuals, corporations, trusts,
          non-resident aliens, non-profit foundations ...
          whatever.  Check with the corporation office in your
          state to see if it is available in yet.  Many states
          have already provided for limited liability companies,
          and enabling legislation is pending in many more.
          
          
          
