Choosing a Legal Structure of Your Business

"The type of legal format you chose depends on the following factors:

Your need for capital
Your type of business
When you want to start your business
Your ability to finance your business
The number of people involved in the business
The liabilities and risks you are willing to assume
Your personal tax situation
Your plan for taking money out of the business
Your plan for continuing the business if something should happen to you
Your long-range business plan

There are four main ways to organize your business: the sole proprietorship, the partnership, the corporation, sub charter S corporation, and the limited liability company. The legal structure you choose will determine how much paper work you will have to do, how much personal liability you will incur, how you will be able to raise money, and how your business will be taxed. Keep in mind that your initial choice of a business form doesn't have to be permanent."

Read more in this excellent summary from 1000ventures.com.