To protect everything they work so hard for, most experienced entrepreneurs are saying “so long” to sole proprietorship.

How entrepreneurs organize their business has a tremendous impact on their ability to maximize profits and protect their personal earnings over the long haul. Since sole proprietorship, the most common type of business, lacks the ability to protect earnings, it’s become commonplace for entrepreneurs to begin each venture as a limited liability company (LLC) or corporation. The right legal structure can reduce or eliminate a business owner’s personal liability exposure as well as the risk of being audited by the IRS.

Today, LLCs are an increasingly popular choice of entity for new businesses. There are many valid reasons for this, especially for certain situations, such as real estate ownership. And they are a little less formal (for example, there are no requirements for annual meetings). A limited liability company (LLC) is a legal entity formed under state law and it can be used even though there is only one owner. This legal status gives you personal liability protection; any business creditors can only look to the assets of the company to satisfy their claims. Taxwise, an LLC is taxed just like a sole proprietorship, with income and expenses of the business reported on Schedule C of your personal tax return.

To gain benefits beyond personal liability protection, entrepreneurs choose to incorporate in Delaware or form a corporation in the state they reside. A corporation is a separate legal entity set up under state law that fully protects the assets of its owner (shareholder) from the claims of creditors. Incorporation automatically creates a regular, or “C,” corporation, which is a separate taxpaying entity. As the owner of a corporation, and not an unincorporated business (such as a sole proprietorship or LLC), the entrepreneur pays Social Security and Medicare (FICA) taxes only on the salary they take from the business. The corporation also pays a like amount, which is deductible from its income, reducing what business owners report on their tax return.

A hybrid of corporation and LLC structures is the “S” corporation. This is a standard corporation that get’s taxed at the personal level (like an LLC or sole proprietorship).  Profits, losses and other tax items pass through the corporation and are reported on the personal tax return of business owners(the corporation does not pay tax). An S election can be made even by single shareholder corporations.

In the past, S corporations have faced far fewer audits than sole proprietorships — in 2004, only 0.19% of S corporations were audited. This compares with 3.15% of sole proprietorships with gross receipts under $25,000. The percentage of larger sole proprietorships that were audited was 1.47% for businesses with gross receipts between $25,000 and $100,000, and 1.86% for those with gross receipts over $100,000.

When it comes to choosing a legal structure, it’s a good idea to talk to your lawyer and CPA prior to making a selection — but be prepared for conflicting advice. Both experts view the choices from their own lenses. This means that a lawyer may favor forming an LLC with protection in mind, while a CPA sees the additional tax benefits of a corporation.

In the end, choosing the legal structure for a new business must be a personal choice for each entrepreneur.

Want to learn more about the advantages of each type of structure? Visit business incorporation services leader BizFilings today.  By offering a free webinar on choosing a legal structure and tools such as a “formation assistant” that walks you through important considerations, it’s a great place to gather valuable information.