In times of economic downturn, many folks start their own businesses in an attempt to bolster flagging income or to replace a lost job. If this is you, consider the following.

First, take the time to create a business plan. The Internet abounds with business plan templates and suggestions for creating a plan. Starting a business without a business plan is planning to fail. You need to decide, not just what goods you will sell or services you will provide, but what will distinguish you in the market of goods and services competing for the attention and scarce funds of your potential customers.

A good business plan includes sections on business purpose and goals, marketing, staffing, competition, budgeting and financing. Qualified professionals in each of these areas can help you construct the plan, for a fee. The local Economic Development office, Small Business Administration and others will often provide assistance for free.

The local Chamber of Commerce, Economic Development office, known business leaders and others engaged in the same market or purveying the same goods or services in another similar market are good sources of general information about what has succeeded or failed before. The company trying to get you to purchase a franchise, and the friend trying to place you in his or her multi-level marketing downline, are suspect. However, a well-run franchise will provide significant assistance in developing your plan – usually for a significant investment.

Second, determine where you will find startup capital. Insufficient capital is a major cause of business failure. Include the costs of maintaining your own standard of living. Not many businesses cover all of their own costs for the first year or two, and most fail to return a profit to their owners for at least two years.

Talk to your financial planner and your banker or other loan officer. Your banker will generally require a business plan before considering a loan. Your financial planner might be able to help you discover sources of funding in your investments and retirement assets. Don't neglect family and friends as sources of capital, but remember that if your business fails, the personal implications might be unacceptable.

Third, decide what form of business you will utilize. Most businesses will benefit from using a limited liability entity such as a limited liability company or corporation. Either of these will generally keep creditors of the entity out of the personal assets of the owner. Generally, a limited liability company is simpler to manage, but that same simplicity can be inappropriate for some business models.

Fourth, elect a tax entity. This is a separate decision from the form of business entity.

A corporation can be taxed as an S corporation or a C corporation. In either case, the IRS will generally require that the owners receive compensation through reasonable salaries; what is "reasonable" is a factual question. In an S corporation, the profits of the business are taxed directly to the owners, while in a C corporation the profits of the business are taxed at the corporate level and again when dividends are paid to the owners.

A limited liability company can be taxed as a sole proprietorship if it has only one "member" (analogous to a shareholder) or as a partnership if it has at least two members. Or, it can elect to be taxed as an S or C corporation regardless of the number of members. If the LLC is taxed as a sole proprietorship or partnership, the owners will generally be liable for self-employment tax. If the LLC is taxed as a corporation, the corporate tax rules above generally apply.

Either entity can elect to change the form of taxation from year to year. There are tax consequences of changing the tax entity, so it is important to be sure where you are headed from the beginning.

These decisions are best made in consultation with your attorney and accountant. If your adviser cannot articulate these distinctions, seek other counsel. Remember that the attorney who handled your auto accident and divorce cases might not be familiar with tax issues, and your tax preparer might not be familiar with business taxation.

May you prosper!