Starting your own business can be overwhelming, especially when it comes to learning about the legal aspects and the various business entities you can choose when you are ready to incorporate your business.

The type of business structure you select should be based on many factors, from your type of business and financial situation to the number of owners. Your choice will have serious ramifications as well as benefits, and it deserves a great deal of research and consideration.

Think about your liabilities and risks
If you operate a business with a great deal of inherent risk, such as performing services at customers' homes or giving legal or professional advice, you want to incorporate or form an LLC to gain limited liability protection. This will protect your personal assets from claims and debts of your business, including lawsuits brought by customers, creditors or vendors. If you stay with a sole proprietorship, general partnership or limited partnership, you and other owners will be personally responsible for any debts and liabilities of the business.

Think about the cost and formalities of your options
Incorporating or forming an LLC comes with some expense, and each entity has a different level of formalities and requirements that you must meet. Partnerships and sole proprietorships are by far the easiest to set up with no filing fees or annual reports to consider. If you choose a corporation or limited liability company, you will need to pay specific fees that depend on your state of incorporation and the number of stocks you issue. You will also be required to keep detailed records and file certain documents regularly.

Still, a limited liability company is more affordable than a corporation, with much more lenient rules.

Consider any tax consequences
If you choose to form an LLC, sole proprietorship or partnership, profits are taxed in the same manner as a pass-through entity. This means that losses and profits are passed through the business to the owners, who must report their share on their own income tax return.

If you decide to incorporate, your share of profits is not reported on your income tax return. You pay taxes on profits you receive as a bonus, dividend or salary. The corporation will also pay taxes on profits at the corporate level, and on paid dividends. This is double taxation.

If you form a limited liability company, you can choose how you want to be taxed, however. You may be taxed as a sole proprietorship/pass-through entity, an S corporation or a C corporation. This is the only entity that allows you this choice.

What about investors in the future?
Finally, consider what will happen if you want to turn to investors at some point in the future. If you do, it probably makes sense to incorporate, as you can issue ownership shares. In fact, many investors will not invest in an LLC, only a corporation. If you do not plan to use investors or take your company public, it is likely not worth the added cost and time to incorporate.