If you’re thinking of working as a home-based freelancer or you operate a home-based business, here’s a question you’ll eventually ask yourself: Should I incorporate or remain a sole proprietor?

Well, the primary reason that most small businesses incorporate is to protect the owner(s) from personal liability that might arise from business practices. Let’s say you’re making gift baskets and a customer’s 8 year old drinks the wine it. (Don’t laugh, it can happen.) Good chance you and your business will be sued. If however, you have operated as a corporation, your personal assets should be safe.

If you’re in a business that isn’t a breeding ground for lawsuits, or if you really don’t have much in the way of personal assets that need protecting, you may find the complications of a corporate form outweigh the benefits.

Other factors that weigh on the decision of business form include: taxation, cost, and paperwork.

Here’s some basics about the various business forms.

A sole proprietorship is the most common and easiest business structure. There is no significant cost to start or maintain a sole proprietorship. Paperwork hassles are minimal. And your profits are treated as personal income and filed on your regular personal tax return. On the downside, the owner is fully liable for the actions of the sole proprietorship.

A partnership, which involves two or more people, is more costly to start (since legal documents are involved) and requires more paperwork than a sole proprietorship. Your share of the profits pass through to your personal tax returns just like in a sole proprietorhship. And, unless it’s a limited partnership, you are personally liable for the business of the partnership.

A corporation is a legal entity that is created to conduct business. When properly managed, the corporation is considered separate from those who run it. The cost of forming a corporation ranges from a couple of hundred dollars to thousands of dollars, depending on what State you live in (or incorporate in) and how complex the structure is. S Corporations (short for Subchapter S), a “light” version of the regular corporation, are typically a better bet for small businesses because they avoid double taxation. Instead of paying taxes at the corporate level, and then again at the personal level, the profit of an S Corporation passes through to the owner’s personal taxes. The paperwork involved in properly maintaining a corporation is significant but not insurmountable once you get the hang of it. Producing corporate (as well as personal tax returns) will cost you in accounting fees as well. Your State government will get it’s share of the wealth too. Most states have annual corporate fees, and some are even structured as a percentage of income so be sure to check with your Secretary of State before you make the switch. All told, you can probably figure on paying between $1,000 to $4,000 annually to maintain a simple S corporation.

Finally, a limited liability company (LLC), allows its owners to take advantage of the benefits of both the corporation and partnership form. Profits and losses are taxed at the personal level and the owners are shielded from personal liability.

One final related thought: if your doing your own taxes, you might think about turning that task over to an accountant. Not only can an accountant (not a tax prep company) help you find deductions you might be missing, they also may be able to keep Uncle Sam off your back. Indeed we worked with one that knew his way around because he was a former IRS agent. (His first question to us was, “Do you want to eat well or sleep well?”)

What’s the big deal? Sole proprietorships are the most commonly audited form of business. And owner-prepared returns are audited more than others. Even if you’re doing everything right, audits are costly and time-consuming. A CPA’s signature on your returns is a good insurance policy.