Follow these tips to choose which business structure is most beneficial for your homebased business.
If you are a homebased business proprietor, you have several options in terms of the formal structure of your business: sole proprietorship, limited liability company (LLC) or corporation. If you are entering business with another person, you should definitely look at a LLC or a restricted liability partnership (LLP), in addition to a traditional partnership. Listed below are the key issues you should look at when weighing which will be best for you personally:
- Cost to create the business
- Complexity and time involved to keep the legal structure
- Potential personal liability in case of litigation or business failure
- Effect on finding a loan or attracting investors
- Business image
- Tax consequences, like the cost of tax preparation by a specialist
Let’s compare each one of the business forms obtainable in terms of the factors:
Operating as a sole proprietor can cost you the least to start out and maintain. It is also the cheapest in terms of having your taxation statements prepared–you’ll simply file a schedule C to go with your 1040 form. A corporation, alternatively, costs the most to start out and maintain. The expense of operating an LLC will be somewhere within the two, even though some states, like California, tax LLCs like corporations therefore the costs may be much like that of corporations.
In case you fail to get yourself a business license or register a fictitious name for your business–if you’re using one–in the eyes of the federal government, you’re automatically a sole proprietor. That’s how easy it is–there’s no paperwork to complete and file. Alternatively, forming an LLC or incorporating requires that legal paperwork be used and that you keep up your legal status, that involves ongoing paperwork.
As a sole proprietor, you’re personally in charge of from business debts and damages to lawsuits. Your very best protection is usually to be adequately insured. By incorporation or forming an LLC, your major advantage is you could at least theoretically protect your individual assets, such as your house as well as your savings, from business losses. The reason why this can be only theoretical is that to get a bank loan or even credit, the grantor may insist that you sign the paperwork as a person furthermore to signing in the name of your company.
If finding investors is one factor in your decision, incorporating may be the strategy to use: The corporation’s permanence and capability to extend away from lifetime alone make it more desirable.
Business image is another factor favoring incorporating. People associate size and permanence with the terms "Inc." or "Corp." towards the end of your business’s name.
The advantages to be taxed such as a corporation generally don’t begin to activate until you’re producing a lot more than $100,000 a year in income for yourself. In order to avoid paying double taxes–first as a corporation on its income and individually on everything you collect as dividend income from the corporation–your tax professional is likely to advise you to select subchapter S tax treatment. This implies you’ll pay your taxes just like you were a sole proprietor. Since tax policies vary among states, have a look at how a state treats LLCs and corporations.
If you are teaming up with another person, then you will have to weigh advantages and disadvantages of forming a partnership, a restricted liability company or a corporation. While partnerships will be the most affordable and simplest to start out, the benefit of an LLC, LLP or a corporation is you could limit your individual liability.
Finally, before making a decision on these options, you need to consult a lawyer and tax professional who’s well-versed in small-business or homebased business issues and/or read among the specialty legal books offered by www.nolo.com.
After applying these considerations to your position, you might find you make a different decision on how best to organize your business from another homebased business proprietor, even if you are starting the same sort of business in the same town simultaneously.
Authors and career coaches Paul and Sarah Edwards are Entrepreneur.com’s "Homebased Business" columnists. Their latest book is THE VERY BEST Home Businesses for folks 50+ . Contact them at www.workingfromhome.com.