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Choosing Your Form of Business Organization

One of the most important decisions you will make is how to set up the business as a:

  1. Sole Proprietorship
  2. Partnership
  3. Corporation

Remember, however, that unless you are independently wealthy, the small business owner risks it all, no matter what form or organization. Most home-based businesses are sole proprietorships or partnerships. A comparison of the advantages and disadvantages of each follows:

THE FORMING OF A BUSINESS ORGANIZATION DEPENDS ON Legal Restriction Kind of business operation Need for capital Tax advantages or disadvantages Liabilities assumed intended division of earnings Perpetuation of the business Number of people associated in the value

Sole Proprietorship: This is the least costly way of starting a Business. You simply register your business with the county and start up.

Advantages Disadvantages
Easiest to get started Unlimited Liability
Greatest freedom of action Death or illness endangers business
Maximum authority Growth limited to personal energies
Income tax advantage Personal affairs easily mixed with business
Social Security advantage  

Partnership: You can for a partnership simply by making oral or written agreement between two or more persons. You would be wise to consult an attorney to have a partnership agreement drawn up and to handle any other necessary paperwork.

Advantages Disadvantages
Two heads are better than one Death withdrawal, or bankruptcy of one partner affects business
Additional sources of venture capital Difficult to get rid of bad partner
Better credit rating than corporation of Similar size Hazy lines of authority

Corporation: A corporation is a separate legal entity, which you (and others) own. You may think a small family corporation does not need an attorney, but an attorney can save member of a family corporation from hard feelings and family squabbles. The corporation form is usually the most costly to organize.

Advantages Disadvantages
Limited liability for stockholders Give owner a false sense of security
Continuity Heavier taxes
Transfer sales Power limited by charter
Easier to raise capital less freedom of activity
Possibly to separate business legal formalities
Functions into different corporations Expensive