When you start a home-based business, there are so many things to think about. Your business structure is one important decision you shouldn’t ignore. Many home business owners automatically assume that other than being a sole proprietorship or forming a partnership no other business structures apply to their business. Not so, and understanding the differences of each structure can help you pick the one that best fits your business. The following are some of the most common business structures to consider:
Sole Proprietorship
A sole proprietorship is probably the most simple business structure. It is a business owned by only one person and there is no legal distinction separating the owner from the business. Any profits or losses are procured by the owner. It’s important to realize that any legal action taken against the company is essentially legal action against the owner.
Partnership
A partnership is a lot like a sole proprietorship, except there are two (or more) people involved. Both partners share the profits and losses, and there is no legal distinction between the partners and the business. A partnership can be a great way to start a business when you need financial assistance, the notoriety that can come from partnering with someone who already has a large client-base or a reputation in your industry or niche.
Most business and legal experts recommend creating a partnership agreement before you start doing business together. My husband was involved in a partnership that didn’t go so well. He had a partnership agreement in place, but should have included a lot more detail about things like what happens when one partner no longer wants to be a part of the business. Include as much information as you can to cover and protect yourselves. I’d even go so far as to recommend that you have a lawyer review the agreement before you sign. I’m not trying to scare you – a partnership can be an excellent business move when done right.
Corporation
A corporation is the most common business organization. Legally the owner(s) and the business are recognized as sepaarte entities which means your personal assets are protected should anyone attempt to bring a lawsuit against you because you have what is known as limited liability. A corporation is owned by a group of people known as shareholders.
S Corporation
An S corporation is a lot like a corporation. The biggest diffrenec between the two structures is that S corporations do not pay income taxes. Instead any losses or profits from the business are passed on to the shareholders.
An S corporation can cost a lot to set up, and you’ll need to familiarize yourself with several requirements and regulations that must be maintained.
Limited Liability Company (LLC)
A Limited Liability Company is a combination of a sole proprietorship and a corporation. As an owner of a Limited Liability Company, you will have limited liability and you get to choose whether or not to be taxed as a corporation, sole proprietorship or a partnership.
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