Going into business is part of the American dream. Each year, hundreds of thousands of people do it, and they often consult lawyers to talk about whether to incorporate.

Until a few years ago, the decision was simple. If an entrepreneur feared liability to creditors, incorporation was the way to go. Small-business corporations came in two flavors, S and C.

Companies organized under Subchapter C of the Internal Revenue Code were taxpayers -- and still are. This is the dreaded specter of double taxation. The corporation pays taxes on its earnings, and stockholders pay taxes on dividends.

Almost everything that has happened in the world of business organizations in this century has been aimed at avoiding double taxation.

For most small-business people, C corporations are a poor choice. Congress, however, provided relief in Subchapter S of the code. An S corporation isn't a federal taxpayer at all. It merely reports profits. The company's stockholders then pay taxes on the profits. That eliminates double taxation.

Thickets of Regs
Still, and although Congress recently made this easier, the tax code contains a thicket of regulations about S corporations. They are limited to 75 shareholders, all Americans. Trusts, for example, cannot be S corporation shareholders in most cases. Nevertheless, S corporations have their advantages.

For one thing, an S corporation can pay dividends. That's one way of getting money to owners, who don't have to pay employment taxes on dividends received. Employment taxes pay Social Security, unemployment and Medicare. This year, the first two cut off just below $65,000, but Medicare taxes don't have a ceiling.

So, if your business has managers who are high earners, take a close look at S corporations.

Latin American Inventions
South Americans invented limited liability companies, or LLCs, years ago. Gradually, they have spread. Limited liability companies were relatively little used until about four years ago, when the Internal Revenue Service issued new regulations authorizing taxation of LLCs as partnerships.

Partnerships, of course, consist of partners. Each partner pays income tax but, as in an S corporation, the firm merely reports. In partnerships, there isn't a problem of double taxation.

There is a big problem of unlimited liability. The law sticks each partner with all partnership debts. That's why lawyers almost never advise clients to get into a partnership.

Similarly, proprietors are responsible for the debts of their one-person businesses. These organizations are safe only when your investment is completely passive. Think of a landlord-proprieter holding a long-term, triple-net lease. There's not much to go wrong. Your tenant can default on payment, which is your problem. Or someone can suffer an injury on the property, which normally you would cover with insurance.

Escaping Creditors 
Partners escape liability by setting up limited partnerships. These include a general partner, often a small corporation, which puts everything at risk. Limited partners are safe from their company's creditors as long as they don't move too far into management.

Still, it's just when things go wrong and creditors start hammering on the door that the temptation to take over management is greatest.

For small businesses and some not so small, LLCs often combine the best organizational characteristics. They protect owners from liability to creditors, and they do it without penalizing actions to control a business. In addition, the tax treatment of LLCs is favorable, unless you're a member manager of such a firm earning more than about $65,000 annually.

Corporations, in one form or another, go back hundreds of years. Partnerships are similarly ancient, while limited partnerships began early in this century. Limited liability companies, however, are new.

So are limited liability partnerships, or LLPs, a new form of organization which, in New Mexico, won legislative approval in 1995.

LLPs appeal particularly to those who want partnership tax benefits. They do not want, however, to deal with malpractice claims against their fellow partners. The LLP setup protects partners from each other, an idea with great appeal to accountants, doctors, lawyers, architects, engineers and others who can be liable for malpractice rather than for ordinary negligence.

Picking the right form in which to organize or reorganize your business is more complicated than ever before. At the same time, if you're careful, you'll probably find a form better suited to your needs than ever before.

As you think about needs, bear in mind that, over the years, a startup becomes a mature business, which in turn may be sold to finance an entrepreneur's retirement. The form you select should cover your needs and confer maximum safety under all these circumstances.

Most of the time, the decision on what business form to use probably should be made by you, your accountant and your lawyer, working together.

The question now is far more complicated than simply: "Should I incorporate?"

Martin Paskind is an Albuquerque lawyer. His practice emphasizes legal services to small businesses. Questions or comments can be mailed to him in care of the Albuquerque Journal, P.O. Drawer J, Albuquerque, N.M. 87103. This column is not intended to provide legal advice to any specific person, or with respect to any particular problems or situations.
For advice on specific problems and circumstances, contact your attorney.