Starting a small business can be exciting — and a little overwhelming. One decision you’ll need to make before you get going is what legal form your business will take.

Sole Proprietorship

If you will be the only owner, you can operate the business as a sole proprietorship or form a limited liability company (LLC) or a corporation. A sole proprietorship is the easiest. Basically, there is no entity separate from you, although you can have a business name (often referred to as a DBA, short for “doing business as”). You can have employees, but you don’t take a paycheck from the company yourself.

For federal income-tax purposes, your business income and expenses are reported on Schedule C, an attachment to your personal return. In addition to income taxes, your net earnings from the business will be subject to self-employment taxes (in lieu of the Social Security and Medicare taxes paid by employees and their employers).

Limited Liability Company

Unlike a sole proprietorship, a limited liability company (LLC) is a separate legal entity. You can form an LLC solo or the business can have co-owners (called “members”). You might prefer an LLC or a corporation over a sole proprietorship if you are concerned about protecting your personal assets in the event your business is sued. But business lenders generally require personal guarantees from a small company’s owners, so you’ll probably be on the hook personally for loans made to your business even if it is an LLC or a corporation. As for federal taxes, an LLC’s income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Corporation

A corporation is a separate legal entity that transacts business, buys equipment, borrows money, etc., in its own name. Although a corporation can be very large and have thousands of shareholders, even a small business with one owner can incorporate. Insulation from personal liability is often a key motivator for forming a corporation (but note the caution regarding personal guarantees).

A corporation files its own income-tax returns. Unless a “Subchapter S” election is made, the corporation uses a corporate tax rate schedule to figure the federal income taxes due on its taxable income. If corporate earnings are distributed as dividends, that income is taxed a second time to the shareholders, and the corporation receives no tax deduction for the dividend payments. However, as a shareholder working for the company, you generally would take a paycheck, which lets you draw out corporate earnings on a tax-deductible basis.

Making a Subchapter S election avoids the potential for double taxation. An S corporation generally does not pay federal income taxes itself. Instead, the shareholders are taxed individually on their share of the corporation’s taxable income. This treatment is not available for state income-tax purposes in some states.

Partnership

By definition, a partnership is a business with more than one owner. It is similar to an LLC or an S corporation in certain respects, but it must have at least one general partner who is liable for the partnership’s debts and obligations. Investors who won’t play an active role in the business can receive limited partnership interests. A limited partner’s liability risk is limited to the amount invested. Partnerships do not pay federal income taxes; business profits and losses are divided among the partners according to the terms of the partnership agreement and taxed to them individually. A partnership must file an informational return with the IRS annually.

SEPTEMBER

15  Individuals: Third installment of 2009 estimated tax due; file Form 1040-ES.

15  Corporations: Last day for filing 2008 income-tax return (Form 1120, 1120-A, 1120S) by a calendar-year corporation that obtained an automatic six-month filing extension.

15  Corporations: Due date for depositing the third installment of estimated income tax for 2009.

15  Partnerships: Last day for filing 2008 return (Form 1065) by a calendar-year partnership that obtained a five-month filing extension. Note: This is a change from prior years.

OCTOBER

15  Individuals: File 2008 federal income-tax return and pay any tax due if you obtained a six-month filing extension.

NOVEMBER

2  Employers: File Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2009.

10  Employers: Deferred due date for Form 941, if timely deposits were made.