There are many business models from which to choose, but if you're a newbie, it's safest to go with an established type. An overview of the most-used models may help you choose the one that best fits your needs.

Sole Proprietorship

One owner is responsible for the entire operation and for all business debt. She takes the risks, and she reaps the benefits. Yet being a sole proprietor doesn't mean that the owner is in business all alone. She may employ many people, but hasn't created any formal structure such as a corporation or LLC.

One disadvantage of a sole proprietorship is that personal assets aren't protected from litigation or creditors. Another is that the owner must pay taxes on all profit as income, whether or not she pays herself a salary. For example, when business expenses are deducted from the total business income, whatever remains is assessed as income to the owner. On top of this, the owner is subject to self-employment tax on all income, a tax shared between employee and business under a corporation. A sole proprietor pays her share and the business's share. However, the sole proprietorship is a simple operation with very little structure and regulation, so some business owners prefer it to other business models.

Partnership

A partnership is much like a sole proprietorship, except that more than one person shares responsibility for business operations. As with sole proprietorship, no formal structure is necessary. Partners share profits and losses and are personally responsible for business debt. The downside is that if your partner skips town, you're responsible for the entire business debt, not merely your half.

C Corporation

This model protects your personal assets from business liabilities and losses, particularly from lawsuits and creditors. The corporation becomes a legal entity that is created through the state, which can open bank accounts, enter into legal contracts, and issue shares of ownership. If one person forms a corporation, he holds 100 percent of its shares and holds all offices — president, vice president, secretary, and others. He also pays taxes on profits as well as on dividends from shares. If multiple owners exist, their liability and profit is determined according to numbers of shares; a board of directors, elected by shareholders, appoints officers.

A major advantage of corporations is that they've been operational a very long time. Therefore, with years of case law behind it, the corporation model is stable and not likely to be affected by major alterations, unlike LLCs, which are comparatively new.

In regard to taxes, the occupation of private investigation is labeled as personal service. In simplified terms, any profit remaining after payment of the owner's salary (the investigator is a salaried employee of his corporation) is usually taxed at a higher rate than for a sole proprietorship or partnership. The alternative is to take every bit of profit as salary, which is not good business, or shift money to take advantage of lower tax brackets. Without an in-house accountant, this can be expensive and time consuming. The solution may be the S Corporation.

S Corporation

The S Corp also protects personal assets from business liabilities. The main difference between S and C is that the S Corp is a “pass-through” tax entity. As such, it passes income and loss through the corporation to the individual owner(s). Some describe this as paying taxes once, as opposed to paying twice with a C Corp. This is not entirely accurate, but in simple terms, the same profit subject to self-employment tax under the C Corp is not assessed under the S Corp. It's only assessed, or taxed, under personal income, not personal and corporate income.

In addition, S Corps are restricted to 100 shareholders, shareholders must be U.S. citizens or an estate or trust of citizens, and only one class of stock may be issued; no preferred stock is allowed. Additionally, S Corps are required to use the calendar year as fiscal year, while C Corps aren't.

Limited Liability Company (LLC)

This model provides the protections afforded the corporation without the massive amounts of paperwork. The owner isn't required to hold lengthy meetings nor keep minutes, which saves time, paperwork, and possibly employee costs. Another plus is that the owner is spared some restrictions of the corporation but is granted the same ability to deduct operational losses against income.

Tax options are flexible in that owners can choose to pay taxes as do C Corps or become pass-through entities such as S Corps. C Corps pay what is sometimes called double taxation, providing increased flexibility. Using income shifting, they're allowed to move money around to take advantage of lower tax brackets, thus reducing tax liability. LLCs aren't allowed this flexibility (neither are S Corps).

One disadvantage, that only time will cure, is that LLCs haven't been operational nearly as long as other business formations; therefore, credit may not be extended as readily. In fact, several states restrict the operation of LLCs in minor ways. Yet operational requirements are simple compared to corporations, and there's no denying that LLCs are growing in popularity.

DBA

DBA stands for Doing Business As. DBA is also called assumed name, fictitious name, or trade name. It doesn't protect your business name or lend liability protection, but registering a DBA, according to your state's requirements, allows you to open bank accounts and legally operate under a name that's different from your legal name.

Other types of business entities include nonprofits, limited liability partnerships, and limited partnerships. There are some exceptions to the examples provided, so find a good accountant to help you decide which business formation is best for you.