If you're thinking of starting a business or have already taken the leap, chances are you've heard from someone about how you have to set yourself up as a ______________. The ______ will differ depending on who you talk to, and what they believe to be the most important reason to have an entity for your business. So who's right? As with anything, the answer depends on the particular situation. However, there are some helpful things to know about each of the more common entities.

• Sole Proprietor/Partnership : These are the default entity types. If you go into business for yourself and don't take any action toward creating an entity, you are automatically classified as a sole proprietor. Similarly, if you go into business with someone else and take no entity formation action, you are automatically in a general partnership. Neither of these options offer tax or liability benefits (in other words, the individuals are completely liable for the debts and actions of the business or the other partner in a partnership).
• Limited Liability Company : Often referred to as an "LLC", this type of company offers liability protection for your personal assets (members are generally not liable for the debts of the LLC, except in cases of fraud, etc. and provided those assets haven't been used as a personal guarantee for the business). LLCs can also offer tax advantages over operating as a sole proprietor or partnership (which is why an accountant and tax professional should be among those helping determine the appropriate entity).
• Corporation ('S' or 'C') : Corporations are often referred to as either C or S corporations. These letters refer to IRS Code sections, and thus the biggest difference between the two is the tax treatment. Both types of corporations offer the same liability protection as LLCs, and corporations can also offer tax benefits in that some income from the company may be taken as a dividend (and thus at a lower income tax rate and without self-employment tax). Again, consultation with a small business tax specialist is vital. The major difference between C and S corporations is that C corporations are taxed at both the company and individual (shareholder) level on income, and S corporations are not subject to company level tax.
• All Else : There are, of course, a number of other types of entities: limited partnerships, limited liability limited partnerships, cooperatives, etc., and a number of other issues besides tax and liability to consider when choosing your entity type. However, knowing a bit about the most common types will hopefully arm you well enough to deal with the next armchair lawyer/accountant/tax professional/_________ you run into.