When starting an affiliate business, generally the “business” portion of it is the last thing on your mind. After all, you’ve got articles to write and keyword research to do.

But don’t be fooled; setting up the proper business structure or changing it can better protect you from legal action and even save you some money, too.

Here’s a general breakdown of the most common business structures available to you in the United States (other countries may be the same or different). I plan on posting more indepth details for each structure in the near future.

Sole Proprietorship - (IRS)

The simplest and most convenient business form you can use. If you’re starting to generate a little affiliate income and haven’t officially registered with any government agency, you’re operating as a sole proprietor. Another tell tale sign is you’re using your social security number as your tax id when some merchants request it to send you payment.

In some areas you may choose to register for a DBA name (Doing Business As) or register for specific licenses to collect states sales tax, such as a vendors license.

While convenient, running your business as a sole proprietor could be placing you and your family at risk. All of your personal assets (home, vehicles, etc.) can be seized if your sites are found liable in a lawsuit.

And when it comes to taxes, you’ll need to pay the SE Tax (Self Employment) on your personal taxes (1040) which is essentially double the medicare & social security tax you’d pay if you were a regular employee for another company. When you work for someone else, they pay half of the medicare and social security tax; but when you work for yourself you’re stuck footing the entire bill.

More information on sole proprietorships for online businesses available here.

Partnership - (IRS)

Operating a partnership is slightly more complicated than a sole proprietorship, but not by much. The main difference is you must file information for your partnership in addition to your regular 1040 to the IRS and possibly your state’s tax bureau. However, like a sole proprietorship, all income does “pass through” to your personal taxes

Depending on the type of Internet business you plan to run, this may be an option if you want to work with someone else and increase your odds of success. The major downside is your business won’t generate much income when it first starts, so splitting that small pot 50/50 with someone else can be hard.

If you plan on doing most of the work, with the assistance from others, I’d recommend that you don’t go the Partnership route. It would make more sense to operate as a sole proprietor and pay the other individual(s) as a contract worker.

LLC - (IRS)

This type of structure is a step above sole proprietorships. Because this type of structure is relatively new, they may or may not be available in your home state.

LLC stands for “Limited Liability Corporation,” and it is just that. An LLC doesn’t offer as much protection as regular corporations, but owners do have limited personal liability for the debts and actions of the LLC.

Another benefit is LLCs also allow pass-through taxation, which is a perk for small or single member companies.

S Corporation - (IRS)

With S Corporations things begin to get a little “hairy” in terms of legal and tax requirements. This is the type of business structure I have for my company and I couldn’t see it any other way.

This is the type of structure where you can get the “Inc.” or “Incorporated” added to your business name.

S Corporations, or S-Corps for short, are essentially provided all of the protection of a regular corporation (C Corporations), but have some built in “tax breaks.” When I say that, I mean you avoid double taxation. Instead of your company paying taxes on net income, this flows through to the shareholders of the company (just you if your a single owner) and you pay taxes on this income on your personal income taxes (1040).

It’s important to note that when incorporating, the basic paperwork automatically creates a regular C Corporation (below) and you’ll need to file a Form 2553, Election by a Small Business Corporation, to change your status from C to S.

I highly recommend that if you want to form a C or S corporation that you have a local outfit that specializes in company formation set everything up and file all necessary paperwork.

Regular Corporation (C) - (IRS)

If you have ambitions of raising a company to an eventual IPO, then this is the structure for you. S Corporations, which were mentioned above, have a limit to the number of shareholders there can be; C Corporations have no such rule.

The major downside, however, is the risk for double-taxation which can eat away at a companies profits. Any money left on the company books at the end of the year (profits) is subject to a corporate tax. Then when you pay yourself a wage from your company after getting hit by the corporate tax, you’ll need to pay all the regular income, social security, and medicare taxes. This is what many people refer to as double taxation; you pay taxes twice on the profit your company generates.

It’s important to give this topic some serious thought, as it can greatly affect your financial future. If you’re looking for more information about specific types of business structures, be sure to click through on the links above to the IRS site to read more.