The most usual form is the sole proprietorship—you run the business and are personally responsible for the debts and taxes. So if a supplier is not paid or if an employee injures someone, your personal assets (house, car, checking account) may be attached to pay a judgement.

Since you’re on your own, it’s up to you to pay estimated taxes throughout the year including Social Security and Medicare. You owe the taxes on the year the business receives the income, not the year you pay yourself or withdraw the money from the business. You file the same income tax return forms as usual with the addition of Schedule C (“Profit or Loss from a Business”) and a Schedule SE to report your self-employment taxes (15.3% of the first $94,200 of income and 2.9% thereafter). There are other forms if you have employees. The second year you will do estimated quarterly payments to the IRS based on the amount you made the previous year. This goes toward what you will owe when you file your taxes again. If you make more than your estimated tax covers, you pay the difference at tax time and if you overpaid, you get a credit on the next year’s quarterlies.

However, you’ll need to keep strictly separate records between your business and personal life. Business expenses should be paid out of a business checking account.

This form of business requires the least amount of government paperwork to start—your license, establishment license, city business license and fictitious business statement will pretty much cover it. If you have employees, you should see about getting an employer identification number from IRS.

A sole proprietorship is the hardest business form with which to raise capital. Your start up money is what you bring to the table and any loans you can drum up. You can’t issue stock, for example, in a sole proprietorship in order to generate start-up funds.

The second form of business is the general partnership. Here the business has two or more owners. Each partner files separate income tax returns and pays individual quarterly taxes. The partnership itself does not pay taxes though it files Form 1065. The partnership also sends a Schedule K-1 to the IRS and to each partner. Like a sole proprietorship, IRS taxes you on the income the business made (after all deductions) times your percentage of the business, not on the money you withdrew.

An advantage of a partnership is you have someone to help run the business but it doesn’t protect you from liability. All the partners are individually responsible for the partnership’s debts and liabilities. Say Sally and Jim form a partnership to open a massage business. If the business is sued and loses, not only can the plaintiff (the winner in the lawsuit) come after the business assets, she can pursue Sally and Jim’s personal assets—their homes, cars, bank accounts. Furthermore, this does not have to happen equally. For example, if Jim does not have enough assets the plaintiff may collect from Sally the amount to make the settlement whole.

This suggests another danger to a partnership. Any partner can commit the whole partnership to anything. For example, if a partner signs a contract on behalf of the partnership, the partnership is bound by the contract even if the other partners didn’t know about or even knew about it and disagreed. You need to really know and have confidence in people with whom you’re going into partnership.

There is no special paperwork required to start a partnership beyond that required for any beginning business. However, it would be extremely unwise to enter into a partnership without a written partnership agreement. Because of the great power each partner has and the individual liability of each partner, there needs to be a written contact between you and your partner. This should include how decisions are made. In a real life example, one partner kept firing a manager for showing up to work while drunk and for stealing, and the other partner kept hiring the manager back. Neither partner could legally stop the other’s action. Of course, the one partner could have the manager arrested for theft but the greater issue is the confines of a partnership.

If the division of profits and expenses will not be shared equally by the partners, this should be spelled out. This would be a good place to say who does what if the partners’ responsibilities are different. How do we add another partner? If partners disagree, how do we decide what to do? You may also want to spell out what business the partnership is in, so if you or your partner eventually incorporate another activity on the side, it is clear it’s not part of the partnership. How do you end the partnership?

One thing the agreement can cover is what happens when one partner leaves. Generally this ends the partnership (and the business). The agreement can make a provision for a buy-sell agreement so the remaining partner can buy out the departing one and the business can continue. One important decision this agreement can make is how to calculate the price to be paid for the partner’s share of the business.

You really need an attorney to draft such an agreement and to understand its provisions. Though somebody will probably sell you a book with a partnership agreement and the Internet has samples, the down-the-road impact of getting this wrong or of being burdened with a provision you didn’t interpret correctly is so great, it is better get it right from the beginning. If you don’t set up the rules for your partnership, the state’s law on the subject will govern. If you decide not to draft a written agreement, it would be worthwhile to see what the state’s regulations on partnerships are (you may not like them and then reconsider.)

So why would anyone bother with the hassle of a partnership? It is much easier and more interesting to have someone working with you getting a business started than doing it on your own. Another good reason is capital—with a second owner on board bringing in more capital, you will need to produce less start up money personally.

Some massage businesses incorporate. Incorporating is a business device that is used in part to protect personal assets. Debtors cannot reach the personal assets of one who is incorporated with certain exceptions. Your landlord and suppliers who extend credit will probably ask for your personal signature (not as corporate officer) on all contracts, which make you personally liable for the debt. However, if someone sues the corporation, only the corporate assets are at stake. There are formalities though—you must, for example, hold the annual meeting and keep your assets and those of the corporation scrupulously separate. If you get loose with the details, the court will find that the corporation is not a separate person (that the corporation and you are the same thing), allowing the plaintiff to “pierce the corporate veil” and get at your personal assets.

Occasionally the person behind a corporation wants to pierce his own veil and the court says no. In a 1925 English case, a man formed a corporation to raise timber but bought the insurance in his own name. When the trees burned down, the insurance company would not honor the policy because the man did not own the trees—the corporation did. The court would not pierce the veil to reach around the corporation.

A corporation pays its own income tax (except for an S corporation.) A corporation pays income tax and salaries the owner/s. The owner has to pay taxes on that income but it is a tax deduction for the corporation.

You can avoid this by making your corporation an S corporation. Then the business profits pass through to the owners as they would in a partnership, in a one person corporation, taxes are paid just once. However, the cost of fringe benefits, normally deductible from a corporation’s income, is not deductible in a one-person S corporation. A few states don’t treat an S corporation the same as the IRS does, so you will need to see how your particular state structures the taxes on S corporations. You may want to check with your accountant and run the numbers to see what kind of corporation will make the most sense for you.

Creating a corporation is more complicated than forming a sole proprietorship or partnership.

The choosing of a name is a little more complicated with a corporation. According to trademark law, your new business name cannot be confused with the name of a competitor. If your name is too close, the competitor can sue you, forcing you to change your corporate name and possibly get monetary damages.

For example, if you sold copy machines and wanted to use the name “Zerox,” the Xerox people might be concerned. In 1956, Ed Sullivan, a famous television host, sued a man with the same name who was running Ed Sullivan Radio and T.V., Inc. in New York. The two businesses were held to be so similar that the court ordered the TV company to change their name to E.J. Sullivan Radio and T.V., Inc. Joseph Gallo wanted to sell cheese using his last name but his brothers, who owned E&J Gallo Winery, sued him. You’d think there’s a big difference between cheese (you eat it) and wine (you drink it) but the court said no to Gallo cheese.

The naming is a fun part of starting a business. Take your time and find one that you really like and is unique. You might want a name that makes people think about you and not someone else. So it should not be too similar to anyone else’s. Pepsi spends a lot of money making sure people don’t confuse their product with Coke.

Your state will have a database of corporate names to check. Plus you may want to search Google and Yahoo and You’ll definitely want to look at the US Patent and Trademark Office’s name database. If you’re ever sued and found liable for using a trademarked name and haven’t checked this resources, you face increased penalties. If your state has a trademark database, check that also to make sure your name isn’t too close to anyone else’s.

You may not be competing with a similarly named massage therapy establishment if you’re on the East Coast and the other business is on the West Coast. If they haven’t federally registered the name, you may be able to use it because no one is going to confuse the two. You’ll probably incorporate in the same state where your massage therapy business is located. If you were in a business that could expand to more than one state, this would be a bigger question. But unless you franchise your massage concept, you’ll probably be serving a local clientele.

Big businesses used to incorporate in Delaware because the laws there were friendly to business. However, many states have now moved in the Delaware direction. If you were to incorporate in Delaware, you would need (if you didn’t live in Delaware) to also register as a foreign corporation in your home state and pay a fee. Double paperwork… Check to see if you’ll owe taxes in both states.

You may see ads to incorporate in Nevada where there’s no personal income tax. What the ads generally don’t mention is that you will have to hire someone in Nevada to be available during business hours if someone wants to serve papers against your corporation in a lawsuit. If you don’t live in Nevada, you’ll have to register as a foreign corporation in the state where you’re actually doing business and pay whatever applicable taxes that state charges.

There is a gambit where you rent a Nevada mailing address and get a Nevada checking account so you can pretend the business is really in Nevada and not register as a foreign corporation in your home state. This illusion may be a little hard to maintain for a massage therapy business. Supposedly you avoid your home state taxes and, of course, pay no income taxes in Nevada.

This entails some risks. In California, for example, to do business in the state without qualifying as a foreign corporation is a misdemeanor with fines of $500 to $1,000; people you’ve contracted with can sue to void the contract if you haven’t qualified to do business in the state.

You will need to select your board of directors, who are ultimately responsible for corporate actions. Thereafter, the board will be elected by the shareholders at an annual meeting. The board generally chooses the corporation’s officers. If your state’s law permits, you can have a one person corporation where you’re the board of directors, the corporate officer and the shareholder.

You need to prepare articles of incorporation to file with the state. This document identifies the corporation’s name, address and purpose, the registered agent to accept certain legal documents, and stock information. The business purpose will probably be very broad, in case you later want to use the corporation for something beside massage therapy. The registered agent will probably be you. Sample/boilerplate articles of incorporation are widely available at bookstores and possibly on your state’s Secretary of State’s web site. Once the articles are ready, they are filed with the state’s Secretary of State and a fee is paid.

A document you need to create but not file with the state is the corporate bylaws. This identifies the corporation’s name, address and principal place of business; the number of directors and corporate officers who are authorized; the number and type of shares and stock classes which are authorized; the procedures for director and shareholder meetings (such as how often are they held and where); the procedures for corporate recordkeeping (including instructions on preparing and how they may be inspected); and how to amend the articles of incorporation or the bylaws. The board of directors will formally adopt the bylaws as one of its first actions. Templates for bylaws are commercially available.

If more than one person holds stock in your corporation, you may want to create a shareholder agreement. There won’t be much of a market for your shares you’re not likely to be traded on the stock exchange so if a shareholder wants to cash out, this agreement can specify if the remaining owners have to buy the shareholder out and for how much. Also, if the shareholders are also running the business, you may want to restrict who the departing shareholder can sell to so you don’t end up operating the business with someone with whom you can’t work.

The corporation still requires all the paperwork you would have done for a sole proprietorship-- city business license, zoning permit, fictitious business statement. If you have employees, you’ll need an employer identification number from IRS. Then open your corporate checking account and hold your first board of directors meeting, recording the proceedings in a minute book. You’re official! Don’t forget to issue stock certificates to your shareholders.

Another reason one forms a corporation (besides protecting their personal assets) is to raise money for the business without giving up some management control for the money (as you would with a partnership.) Except it is not that easy. If you’re going to sell stock to people who are not (or more than 10 people who are) actively involved in running the business, your stock will need to be registered with the federal Securities and Exchange Commission and your state. You will probably need a business lawyer to accomplish this.

One of the ways a corporation is different from a sole proprietorship or a partnership is that is doesn’t automatically end if someone dies or walks away. However, when the time come, ending a corporation is more complicated than wrapping up a sole proprietorship or partnership. It requires a vote of the board of directors or, in some cases, a vote by the shareholders. All the creditors must be paid. Remaining monies are distributed to the shareholders. A filing must be made to the state.

Liability for company debts or judgments is held by the LLC—the LLC owners have no personal liability. Just as with a corporation, however, if the owner also personally guarantees the debt, that owner is personally liable. If the owner(s) intermingle LLC and personal funds, the LLC structure may be disregarded and they could become personally liable.

Although a LLC is like a corporation when you talk about liability, it is different when you discuss taxes. The tax liability passes straight through the business to the owners, as it does in a sole proprietorship or partnership, who must each make quarterly estimated tax payments. LLC owners are taxed on their entire share of profits even if they don’t receive them (they might, for example, leave some in the business to buy things.) The LLC itself does file an informational return (Form 1065) with the IRS. Business deductions for LLCs are less generous than for corporations.

Forming a LLC requires filing the articles of organization with, and paying a fee to, your state. LLCs are usually handled in the Secretary of State’s office. A second document, which is not filed with the state, is the operating agreement, which sets out what everybody does and gets. If there is more than one owner, it is crucial that the operating agreement sets forth what happens when an owner leaves. If the agreement doesn’t deal with this, in most states the departure of an owner ends the LLC. Having an operating agreement will help convince a court that a one-person LLC is not a sole proprietorship.

The ability of a LLC to raise capital is similar to a partnership—you bring in someone who is going to participate in the business and that person brings along money. It is possible to have a non-participating owner of a LLC but it gets more complicated and you may need an exemption from security laws.