Q: I have a mortgage consulting business in which I provide mortgage counseling to homeowners who have defaulted on mortgage loans. I act as liaison between the borrower and the lender in negotiating a plan that will bring the mortgage current and avoid foreclosure. I've been operating from home. Should I incorporate? If so, which form?

A: As you know, there are two main reasons to incorporate: limited liability and tax advantages. You don't say what kind of liability you have in your role as liaison, and I assume you have the borrower sign some kind of waiver of liability attesting to the fact that the financial information they provide is accurate. Therefore, there may not be a compelling reason to incorporate for liability protection. If the borrowers visit you in your home office, you may want to check the insurance coverage you now have to ensure you're covered for "slip and falls" and similar accidents.

There could be some tax issues that would make moving from a sole proprietor to one of the other forms attractive. For instance, in a sole proprietorship, you can only get your money out of the business in one way: salary and wages, which are subject to payroll taxes. In a C corporation or an S corporation, you can take some of the money out as dividends or distributions, which are not subject to payroll taxes. For more on LLCs, see my May 2000 Entrepreneur.com column, LLC 101. If you have business losses you want to use to offset other income you might have from another job or from your spouse's employment, for example, you can claim those losses on your personal income tax as either an S corporation or an LLC which both provide "flow through" tax options.

To be sure you're making the correct decision for your particular situation, I suggest you consult with a CPA because the decision should be made on the basis of your income tax bracket, whether you anticipate losses, and other issues.

Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.