Which business structure is right for your startup?

The business form in which you operate must fit your business needs, so you should start with an appropriate structure. As your business grows or your personal situation changes, your business will need to adapt. You should periodically review your business format and decide whether changing it would lower your tax liability.

Business structures include C and S corporations, general partnerships, limited liability companies and sole proprietorships. Each structure has its distinct advantages and disadvantages.

C corporations are taxed as separate entities, and the business has certain tax obligations. The corporation pays taxes, you pay taxes as an employee, and investors are taxed on dividends they receive.

Shareholders are protected from personal liability, though, and only their investment is at risk.

Losses don't pass through to the shareholders either.

C corporations can offer more deductible fringe benefits, but they also receive more IRS scrutiny. You and your employees' salaries should be reasonable or they might be considered a nondeductible dividend for tax purposes.

Also keep in mind that earnings accumulated above the reasonable needs of the company are taxed at an additional 39.6 percent.

S corporations usually don't pay tax themselves, and income and losses pass through to shareholders. Like a C corporation, shareholders are protected from personal liability, and only their investment is at risk.

An S corporation can have up to 75 shareholders, which can be individuals, estates, certain trusts and tax-exempt organizations. If an S corporation employs you, you can avoid FICA taxes by minimizing your salary.

Don't make the salary too low, though, or the IRS will try to attribute more to you and your future Social Security benefits may be reduced.

Partnerships, like S corporations, are popular because they avoid corporate double taxation.

Partnerships are not taxed as business entities. Income and expenses are divided among partners, and each partner pays tax on his or her share of partnership profits, whether distributed or not.

Losses pass through to partners and there are restrictions on how much of a loss can be deducted on the partner's tax return. In addition, personal liability rests with each partner.

Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs) offer many advantages. They are taxed as partnerships, but allow many types of owners and provide limited personal liability.

Family limited partnerships can also offer a number of benefits. You may split income with your children, realize estate tax savings and continue to keep effective control over assets you transfer to the partnership.

If you are sole owner of your business, your personal tax return is your business return. However, if you risk substantial liability in your business, you may want to consider incorporating to protect your personal assets.

Deciding which business structure is right for you is an important decision that should be made along with your team of financial and legal advisers. Also, don't forget to consider state and local taxes when evaluating a business structure.

(Kevin Hogan, CPA, CAM, is a manager with the certified public accounting and business advisory firm of Whitlock, Selim & Keehn LLP.)