When you're a homebased business owner, you have several
options when it comes to the formal structure of your business:
sole proprietorship, limited liability company (LLC) or
corporation. If you're going into business with someone else,
you should definitely consider a LLC or a limited liability
partnership (LLP), as well as a traditional partnership. Here are
the key issues you should consider when weighing which would be
best for you:
- Cost to form the business
- Complexity and time involved to maintain the legal
structure
- Potential personal liability in the event of litigation or
business failure
- Effect on obtaining a loan or attracting investors
- Business image
- Tax consequences, including the cost of tax preparation by a
professional
Let's compare each of the business forms available in terms
of these factors:
Operating as a sole proprietor will cost you the least to start
and maintain. It's also the cheapest when it comes to having
your tax returns prepared--you'll simply file a schedule C to
go along with your 1040 form. A corporation, on the other hand,
costs the most to start and maintain. The cost of operating an LLC
will be somewhere between the two, although some states, like
California, tax LLCs like corporations so the costs may be
comparable to that of corporations.
Content Continues Below
Even if you fail to get a business license or register a
fictitious name for your business--if you're using one--in the
eyes of the government, you're automatically a sole proprietor.
That's how easy it is--there's no paperwork to fill out and
file. On the other hand, forming an LLC or incorporating requires
that legal paperwork be drawn up and that you maintain your legal
status, which involves ongoing paperwork.
As a sole proprietor, you're personally responsible for
everything from business debts and damages to lawsuits. Your best
protection is to be adequately insured. By incorporation or forming
an LLC, your major advantage is that you can at least theoretically
protect your personal assets, such as your home and your savings,
from business losses. The reason this may be only theoretical is
that in order to get a bank loan and sometimes even credit, the
grantor may insist that you sign the paperwork as an individual in
addition to signing in the name of your company.
If finding investors is a factor in your decision, incorporating
is the way to go: The corporation's permanence and ability to
extend beyond your lifetime alone make it more desirable.
Business image is another factor favoring incorporating. People
associate size and permanence with the terms "Inc." or
"Corp." at the end of your business's name.
The advantages of being taxed like a corporation generally
don't begin to kick in until you're producing more than
$100,000 a year in income for yourself. To avoid paying double
taxes--first as a corporation on its income and then individually
on what you collect as dividend income from the corporation--your
tax professional is apt to advise you to choose subchapter S tax
treatment. This means you'll pay your taxes as if you were a
sole proprietor. Since tax policies vary among states, check out
how your state treats LLCs and corporations.
If you're teaming up with someone else, then you'll need
to weigh the advantages and disadvantages of forming a partnership,
a limited liability company or a corporation. While partnerships
are the least expensive and simplest to start, the advantage of an
LLC, LLP or a corporation is that you can limit your personal
liability.
Finally, before deciding on any of these options, it's best
to consult an attorney and tax professional who's well-versed
in small-business or homebased business issues and/or read one of
the specialty legal books available at www.nolo.com.
After applying these considerations to your situation, you may
find you make a different decision on how to organize your business
from another homebased business owner, even if you're starting
the same kind of business in the same town at the same time.
Authors and career coaches Paul and Sarah Edwards are
Entrepreneur.com's "Homebased
Business" columnists. Their latest book is The Best Home Businesses for People 50+.
Contact them at www.workingfromhome.com.