Don’t clown around with the legal status of your business. All photos courtesy of Mark Simon.

Ladies and gentlemen, boys and girls of all ages. Gather around and witness the spectacle of a death-defying feat. A feat braver than taming the lions. More terrifying than flying from a trapeze. Yes, we are talking about starting your own business.

What’s so difficult about that, you may ask. Well, sonny, step right up and witness a decision as big as the bearded lady — determining the legal status of your new company.

Everyone dreams of working for themselves at some point in their career. The money, the glory, the control and more are all possible. However, so are extremely long nights, payroll, tax burdens and responsibility for everything from sales to production to choosing your phone service. To make sure that you keep your tax burden to a minimum, that you protect your personal investments from being affected by the actions against your business or employees, and that you present your new venture in a professional way, you have a number of choices as to how to legally form your company.

Welcome to our five-ring circus. On the far left we have the sole proprietor ring. In the second ring we have our tightrope walkers forming a partnership. In the middle ring you will see the leaping lipizzaners in the Limited Liability Corp., or Llc. In the fourth ring we have the popular S corporation, and, finally, in the big ring with the parading elephants is the C corporation.

Your cubicle clown can look deeply into the horn of legal status options.

Each legal status has its benefits and negatives. Pay sharp attention to the rings, as you don’t want to clown around with your decision.

In the sole proprietor ring, you will see a crowd. This is the most popular type of business status, because it’s also the easiest. All you have to do is say you are in business, and like magic, you are in business. You are the business. Your name is the business name. No extra taxes. No extra forms. Just you and your abilities. All the income and expense for your business go onto your personal tax form.

You can go by a business name other than your given name as long as you file for a fictitious name, or DBA, Doing Business As. DBAs are great to allow you to sound more like an ongoing business, but you can’t use the terms corporation, corp., or inc. in the name, as those terms may only be used by legal corporations. The negatives are that you have no legal protection separating your personal items and investments from those of your business and you don’t get some tax benefits. Your business ID number is your social security number.

Watch out in the second ring, as running a partnership is like walking a tight rope. A partnership is simply a relationship between two or more persons who join to carry on a trade or business. Each contributes money, property, labor or skill and share in the profits and losses of the business. The business itself does not pay taxes. Instead the profits or losses are ‘passed through’ to the partners to include on their personal tax returns. Their personal property also has no protection from judgments against the partnership.

The danger in the partnership ring comes from balancing personal relationships with money, time, effort and expectations. The best safety net is a detailed contract outlining the responsibilities of each partner.