• Research the business concept to make sure it's viable. This is a crucial step and deserves a significant investment of your time.
• Choose the appropriate legal structure for the business: a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company or partnership. The structure determines many tax and liability factors.
• Obtain required federal, state and local licenses or permits and ID numbers.

Business Entity Types

Corporation

A corporation is a legal entity established by a charter granting it certain legal powers, rights, privileges, and liabilities. A corporation can be established by a person or group of people with a charter from the state's secretary of state. After a corporation is created, it becomes its own entity and generally has an indefinite lifespan.

Household Employer

You are a household employer if you hire someone to do household work in or around your home and that worker is classified as your employee. As a household employer, you will be directing the work of the employee(s) you hire. Some examples of household workers are:

• Babysitters
• Nannies
• Au pairs
• Cleaning people
• Housekeepers
• Maids
• Drivers
• Health aides
• Private nurses
• Caretakers
• Yard workers.

Partnership

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants.

• Partners can be individuals, corporations, trusts, estates, and other partnerships.
• Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
• A partnership does not pay tax on its income, but "passes through" any profits or losses to its partners. Partners must include partnership items on their tax returns.

Two common forms of partnerships are general partnership and limited partnership.

Sole Proprietor

A sole proprietor is one individual who owns a company that is not incorporated or registered with the state as a limited liability company (LLC). Sole proprietors may or may not have employees.

In a sole proprietorship:

• The business does not exist separately from the owner.
• The risks of business apply to the individual's personal assets, including those not used for the business.
• The sole proprietor reports business income on his or her individual tax return.

"S" Corporation

A corporation is a person or group of people who establish a legal entity by filing articles of incorporation with the state's secretary of state granting it certain legal powers, rights, privileges, and liabilities. An S corporation is an eligible domestic corporation that wants to avoid double taxation (once to the shareholders and again to the corporation) by electing this status using Form 2553 (Election by a Small Business Corporation).

Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. An S corporation is not a sole proprietor or partnership.

Reference: IRS.gov