Sole proprietorship — This is simply a business owned and operated by one person (who may or may not have any employees). Establishing a sole proprietorship requires no government permission and minimal paperwork, and no new legal entity is created.

Its simplicity usually makes the sole proprietorship an attractive option for new businesses as well as service and professional firms, including most self-employed individuals.

The owner of a sole proprietorship reports business income and expenses on Schedule C, which is filed with his or her personal tax return. The business profit or loss is combined with other personal income. If there are losses, they can generally be used to offset active non-business taxable income.

Perhaps the biggest drawback of the sole proprietorship is personal liability: Since the business itself is not recognized as a legal entity separate from the owner, the owner is personally liable for all business debts and obligations, including litigation.

Partnership — A partnership is a legal entity with more than one owner. It offers many of the same benefits and drawbacks as a sole proprietorship. Owners can be either general partners (each is fully liable for all debts and actions of the firm) or limited partners (liability is limited to the extent of the individual’s investment in the company). Control is divided among owners as specified in a written partnership agreement.

Business continuity is one of the biggest challenges facing partnerships. The death or disability of one partner could force its dissolution. The retirement of a partner could trigger a feud over how the partner’s interest is to be purchased.

This is why experts recommend that partnerships create a buy-sell agreement. This agreement stipulates the terms under which one or all of the remaining partners may purchase the deceased or departing partner’s share in the company. Life insurance policies are usually purchased to fund such a buy-out.

Limited Liability Company (LLC) — An LLC is a hybrid entity that falls between a sole proprietorship or partnership and a corporation. See the next article for more details on LLCs.