Create the right legal structure

One of the first questions every small-busines owner must consider is whether to operate as a sole proprietorship or as a corporate entity. You automatically start out as a sole proprietorship, says Certified Financial Planner David M. Williams, founding director of Business Enhancement Associates LLC in Cordova, Tenn.Operating as a sole proprietor costs no money because you dont have to pay to create corporate documents and tax returns. Whether you should continue to operate as a sole proprietor, however, depends on your business and personal risk tolerance.We always strongly urge people to set up a corporation because it gives you some legal protection, says Don Mazzella, chief operating officer and publisher at Information Strategies Inc., a Ridgefield, N.J., provider of publications for small businesses. Youd be suprised at the liability you can engender when you set yourself up as a business owner. People may come at you with litigation or try to dun you for bills. If nothing else, it protects your personal credit rating.

But Williams isnt convinced a corporate entity is necessary for everyone. I wouldnt say you should run out and form a corporate entity until you know you can be in business for yourself, he says. Its expensive, but its also a waste in both time and money. Once you know you can be successful, if youre doing consulting work and are truly the sole proprietor of your company, staying a sole proprietorship is probably best. If theres more than one person with capital involved whether thats cash or sweat equity form an entity that spells out how much is owned, who is responsible for what, and whether taxes should be paid at the corporate or individual level.Cost shouldnt be the driving factor in structuring your business. Many online sources allow you to create a corporate entity for just a few hundred dollars, says Allen Bostrom, CPA, president and CEO of Universal Accounting Center in Salt Lake City, which trains accountants, tax preparers and bookkeepers. You just put in your information, and theyll create templates. Just a few are Legalzoom.com, The Company Corp., SCORE and Incfile.com.