| When starting a home-based business, one of the first decisions to make is your legal structure. Now that you are going to open a home business, it is time to decide if you are going to be a sole proprietorship, partnership, or corporation. Why should you incorporate? There are two important reasons to incorporate your business: the first is for protection against liability, and the second is taxes. Personal liability means that you are personally responsible for any debts or lawsuits involving your company. Your legal structure will determine how many taxes you will have and the schedule for payments. If you are not certain which legal structure is the right one, be wise and consult with an accountant or a lawyer for advice. There are four legal structures your business may be structured as: sole proprietorship, partnership, corporation, and limited liability company. -
Sole Proprietorship: -
Covers most small businesses and is the most common -
Easiest and least costly to manage -
One person owns and operates a business Pros -
The owner has absolute control -
All profits belong to the owner -
The business can be terminated quickly Cons -
Not having an "Inc." after your name could be a disadvantage when competing with other businesses -
You are on your own with no one to consult with -
It is more difficult to obtain financing should you need it -
The owner is personally responsible for all debts and liabilities involving the business -
The owner's personal assets are not protected from a lawsuit -
In the event of your death, the business dies with you -
Partnerships There are two types of partnerships: (a) general and (b) limited. General Partnership -
A partnership means that you own and operate a business with a partner or partners -
Each partner has the authority to operate the business, hire employees , and handle the finances -
Legal fees are more than for a sole proprietor and less than incorporating -
A lawyer should be contacted to draw up a partnership agreement -
Partnerships should buy partnership insurance (see Chapter 10) Limited Partnership -
This type of partnership has both general and limited partners -
The general partners run and manage the company -
The limited partners or silent partners act as investors and have no say in the operation of the business -
Limited partnerships do not face the same liabilities as the general partners -
This type of partnership has a lot of a paperwork and filing to look after Pros -
Partners can supply more start-up capital -
Partners share in the management and the wealth -
Your profits are taxed as personal income -
You can pool your resources, talents, and energy -
Partnerships are relatively easy to set up Cons -
The "divorce rate" among partnerships is higher than the divorce rate among marriages -
Partners are personally liable for any debts and lawsuits ”even those brought on by their partners -
Partnerships can be difficult to dissolve. Dissolving a partnership can be acrimonious and result in lost friendships. The more detailed your partnership agreement is the less likely it is that this will happen. -
Corporation There are two types of corporations: C-Corporation, or standard corporation, and S-Corporation. The terms C-Corp or S-Corp refer to the way in which the corporation is taxed. C-Corporation -
Standard for all publicly -held corporations -
Most complex of all business structures -
The cost of filing papers of incorporation through a lawyer can range from $300 to $1500 -
Your business is recognized as a separate legal entity from you -
Corporations use "Inc." or "Corp." after their business name -
Corporations are required to issue stock, file annual reports , and elect corporate officers (e.g., president, vice president, secretary, treasurer) Pros -
A corporation limits the personal liability of its owners -
The corporation's debt is not considered your debt -
Corporations can raise money, if needed, by selling stock -
Corporations live on even after an owner dies, retires, or sells Cons -
Corporations are more expensive to set-up , run, and manage, require more attention from your lawyer and accountant -
Corporations are formed under the laws of the state in which they were created and are subject to that state's regulations -
Corporate owners can pay a double tax on the company's earnings (corporate and personal tax) S-Corporation -
Also known as a Subchapter S-Corporation -
This type of business structure is popular with small business owners and entrepreneurs -
An S-Corporation is a pass-through entity, which means that there is no corporate-level income tax Pros Cons -
Requires a substantial amount of paperwork -
Like a standard corporation, an S-Corporation must file articles of incorporation, issue stock certificates, hold shareholders meetings, and keep track of minutes at a meeting -
Limited Liability Company ( LLC ) -
A mix of a partnership and a corporation; however, it is not a corporation -
Created to provide a business owner with greater liability protection without the double taxation (corporate and personal) of a corporation -
Liability is limited to the amount of an individual's personal investment in the company -
Owners are referred to as members rather than shareholders or stockholders Pros -
Unlike an S-Corporation, which limits the number of stockholders to 75, an LLC has no limitation -
Provides the business members protection from any personal liability beyond what they invested in the company -
Capital can be raised through the limited sale of stock -
It is easier to obtain financing from lending institutions -
Unlike a limited partnership that prevents limited partners from having a say in the company, an LLC structure allows all members to participate -
Allows for pass-through taxation Cons -
The regulations for LLCs can vary from state to state -
Just like partnerships and sole proprietorships, LLCs do not go on forever and may dissolve when a business member dies, retires, or becomes disabled -
If your company is going to do business outside of the state you live in, you will need to check the regulations for LLCs in other states -
There is a significant amount of paperwork involved |
