In every economic downturn, corporations shed employees to shave costs. And in every economic downturn, many of those let-go employees make lemons out of lemonade by starting that small business they’ve always dreamed of operating, whether it involves doing what they were doing as an employee or trying something entirely different.

Like all small-business owners, newbies need to start off on the right foot by avoiding legal, tax and financial problems that too often trip up the freshly self-employed. Here are five tips for making your launch successful.

1. Create the right legal structure
One of the first questions every small-busines owner must consider is whether to operate as a sole proprietorship or as a corporate entity. “You automatically start out as a sole proprietorship,” says Certified Financial Planner David M. Williams, founding director of Business Enhancement Associates LLC in Cordova, Tenn.
Operating as a sole proprietor costs no money because you don’t have to pay to create corporate documents and tax returns. Whether you should continue to operate as a sole proprietor, however, depends on your business and personal risk tolerance.

“We always strongly urge people to set up a corporation because it gives you some legal protection,” says Don Mazzella, chief operating officer and publisher at Information Strategies Inc., a Ridgefield, N.J., provider of publications for small businesses. “You’d be suprised at the liability you can engender when you set yourself up as a business owner. People may come at you with litigation or try to dun you for bills. If nothing else, it protects your personal credit rating.”

But Williams isn’t convinced a corporate entity is necessary for everyone. “I wouldn’t say you should run out and form a corporate entity until you know you can be in business for yourself,” he says. “It’s expensive, but it’s also a waste in both time and money. Once you know you can be successful, if you’re doing consulting work and are truly the sole proprietor of your company, staying a sole proprietorship is probably best. If there’s more than one person with capital involved — whether that’s cash or sweat equity — form an entity that spells out how much is owned, who is responsible for what, and whether taxes should be paid at the corporate or individual level.”