? Sole proprietorship ? this is one person owning the business. Downside is that the owner is personally liable for all debts and liabilities of the business. The taxable income (net profit) is included in the owner's personal tax return. The owner can deduct all legitimate business expenses on his personal tax return.

? Partnership ? two or more people form a business and share the profits in an agreed upon split. The taxable income (net profit) is reported on the partner's personal tax returns. Again the partners individually and collectively are responsible for the debts and liabilities of the business.

? A corporation is a legal entity formed by one or more persons under the laws of a specific state or federal statute. Legally it has a separate legal existence from that of its shareholders (owners). Thus, and very importantly, the shareholders are not legally liable for the debts or liabilities including law suits of the corporation with some exceptions. This is a huge advantage to protect the personal assets of a business owner. There are two main forms of corporations:

- C Corporations - shares are held by the shareholders and may be publicly traded. It is taxed separately from its owners under subchapter C of the Internal Revenue Code. In other words, the corporation itself pays income taxes (both federal and state) on the taxable income (net profit) of the corporation. In some situations the income from a C Corporation is subject to double taxation and is not typically the legal form that a small business should utilize.

- S Corporations - shares are held by the shareholders and but can't be publicly traded. An S Corporation is a corporate entity that has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. A corporation when formed by default is considered a C Corporation?thus an application must be made and be approved by the IRS to be a S Corporation. The taxable income (net profit) is passed on to the shareholders who report the taxable income on their personal tax returns. These personal tax rates are typically lower than the corporate rates paid by a C corporation. In California for a S Corporation, there is a minimum annual corporate income tax of $800 paid to the Franchise Tax Board.

Determining the most advantageous legal structure is based on a number of factors including:

? number of shareholders

? annual profits

? exit strategies i.e. plan on how to exit the business

? estate planning

? and other factors

Getting it right from the start of a business is vitally important to minimize taxes and personal legal liabilities.

John Spurgeon is a tax attorney in Pasadena, California servicing clients in the greater Los Angeles area. John Spurgeon & Associates, who are both tax attorneys and CPAs, offer a complimentary initial consultation. Please call 626-440-9518.

About John Spurgeon & Associates

John Spurgeon & Associates is a professional services firm located in Pasadena, California with a focus on tax law and related accounting services. They have extensive experience with federal and state income taxes, payroll taxes and sales taxes. They represent business, non-profits and individuals against the IRS and the Franchise Tax Board (California State Taxes). As both tax attorneys and Certified Public Accountants they offer a broad range of tax related services.