Now that you have started your home-based business, it will be
safe to presume that you’ve made further progress. Next, you will have
to think in terms of taking it one step further. Giving it a legal form
should be uppermost in your mind. The legal structure you may adopt will
be based on you personal preference, taxes, liabilities, business goals
and the type of business. It will be best to study each structure to
know what will suit you the most. The three basic business structures
are:
· Sole Proprietorship
· Partnership
· Corporation
Sole Proprietorship: It is the most popular style of
home-based business enterprise. The ownership lies with the individual.
All you need is a local business license to carry on business under sole
proprietorship.
Advantages
· It is easy and quick to form. You won’t incur much expense to establish a sole proprietorship.
· Ownership is vested with the sole proprietor
· Entire control of the business lies with you
· Profits from the business belong to the proprietor
· Income tax for the business is part of personal tax returns
Disadvantages
· The proprietor is personally liable for all debts incurred by the business
· Borrowing money or procuring outside investment is a tough proposition
· Since the entire managerial responsibility lies with proprietor,
the business may receive a setback if the proprietor suffers debility.
Partnership: A partnership is an agreement between two
or more people to carry out a business or profit venture. Partnership
is of two kinds – general and limited. General partnerships are marked
by sharing of profits and liabilities between/among the partners. In
limited partnerships the liability of the partners is limited to their
share in the business, except at least one partner who is liable for all
business debts. It is important to take legal advice to help chalk out a
partnership deed.
Advantages
· A partnership enjoys the benefit of different areas of expertise of the partners.
· Liabilities are shared among the partners
· Partnerships are exempted from paying federal income tax
· Can avail of loans more easily than in the case of sole proprietorship
Disadvantages
· Forming a partnership is a time consuming and expensive process.
Complexities are involved while forming or executing changes later
· With partners working together, misunderstanding and misgivings
can arise. Different goals and agendas too can weaken or end a
partnership
· Since all partners have a share in the liabilities, you may be liable for the acts committed by your partners
Corporation: Corporations are of three major types –
C-Corporation, S-Corporation, and Limited Liability Corporation (LLC).
Corporations have a legal entity of their own. Forming a corporation can
be a complex process requiring legal advice. However, you can limit
your liability by forming a corporation.
C-Corporation: Being a separate legal entity, a
corporation is taxable. Thus, apart from taxes paid by the corporation,
shareholders also end up paying taxes on the dividends received on their
investment.
Advantages
· Liability of the shareholder is limited to the share holding
· Loans and investments are easier to manage
· The owners and corporation can divide the profit to reduce tax liability
· A corporation continues to exist even in the event of the death of a shareholder or ownership changing hands
Disadvantages
· Forming a corporation costs money and it has its complexities
· Accounts have to be maintained
· An accountant will be required to file tax returns
· Double taxes have to be paid – once by the corporation, and by the shareholders on the dividends they earn
· Corporate fees needs to be paid every year
S-Corporation: It provides limited liability benefits,
though no federal taxes are required to be paid. The profits and losses
of the corporation are transferred to the shareholders.
Advantages
· Liability of the shareholder is limited to the share holding
· Federal income tax is non-existent
· Double taxation is avoided on account of the above point
· A corporation continues to exist even in the event of the death of a shareholder or ownership changing hands
Disadvantages
· Forming a corporation costs money and it has its complexities
· A maximum of 75 shareholders are permitted
· One class of common stock is allowed
Limited Liability Corporation (LLC): This form of
corporation is fast getting popular for its exemption from paying
federal taxes and limited liability benefit.
Advantages
· Owners enjoy personal limited liability
· Exemption from federal taxes
· Allowed more than one class of stock
· Number of stockholders not limited
Disadvantages
· Forming an LLC is complex and requires legal assistance
· The LLC dissolves in the event of a stockholder’s death
· Legal requirements of some states makes having more than one stockholder mandatory