Which Entity For Your Home Business?

Published by Sean M. Lightfoot on Tagged Stocks, Bonds and Currency Markets, Affiliate Marketing, Real Estate Investing, Business

Which Entity For Your Home Business?

This is a decision that all entrepreneurs are faced with at some time or another. Well, I am here to help some of you decide which business type would be best for your business. I have started several businesses and usually opt for Corporation status. There a few different entity types to choose from and I am going to discuss and compare each of them. No business is the same, so each one will have different needs when it comes to it’s formation and business practices. Even if you started a franchise and there were 99 other franchise of the same business, in the same area, each of them would be different. The unique factor that sets your franchise apart from the rest is “You.”

You have to way the options and consider how you plan to handle business to determine which entity type would be best for your business. The are several different business types to chose from which are Sole Proprietorships, S-Corporations, C-Corporations and Limited Liability Companies (LLCs). I’m not going to discuss the types of Partnerships due to the fact that this is a Home Based Business blog and the majority of you are the sole owners of your businesses. If you are interested in learning more about Partnerships, just let me know and I’ll start a new post on partnerships.

Sole-Proprietorship

The first type, Sole Proprietorships are the simplest form to start and manage. The are a few drawbacks for owning a Sole-Proprietorship. The biggest one is “Liability,” and it’s usually the reason most sole business owners chose the other entities like Corporations and Limited Liability Companies. With a sole-proprietorship, because it is owned and run by an individual, the owner is personally responsible for the debts and liabilities of the company. There is no distinction between the owner and the business so they are one in the same.

Sometimes the business name is actually the business owners name. The other times, the owner obtains a DBA (Doing Business As) to give the business it’s own name. Due to the business and it’s owner being considered as one, it could be difficult to obtain funding and loans for the business. The owner’s credit and credentials are used.

Now with the advantages of the Sole-Proprietorship. For one they require very little time and expenses to start. I live in Texas and to form a Sole-Proprietorship, the only fee that is associated with it is the $16 that I have to pay at the County Clerks office for the DBA. Also, since the business and it’s owner are considered one, a separate income tax filing is not needed.

If you have a business that has only yourself as an employee and do not run a high rate of risk, then this formation would be good for your business.

S Corporation

S Corporations are very beneficial when tax time comes. They file for a special tax status using IRS Form 2553 that exempts it from double taxation. A corporate income tax is filed, but the profits are not taxed on that level, instead they are passed through to the shareholders and reported on their individual tax returns. The S Corporations requirements are similar to the C Corp. such as documentation and directors and share holders meetings.

This type of corporation has a share holder limit of 99 and only allows one class of stock. Being a home business, chances are you’ll fall within these limitations! S Corps are more expensive to start than a sole-proprietorships and require much more paperwork. You have to annual director and shareholder meeting and document the meeting minutes.

If you are an unorganized individual and you chose to inc., you might want to find someone to help you with being organized. A late or improper filing of documents and/or tax returns could force your status to being changed to a C Corp. And not keeping your business totally separate from yourself could cause it to be changed to a sole-proprietorship. Corporations are their own entities, they have their own identity and credit history. Combining the two and being unorganized is a sure shot way to end up heading up that smelly creek with no paddle.

For those that require numerous owners, limited liability and the image of a corporation this might be right for you. Both corporations are good in the event the is funding that needs to be raised. You can sell part of your company (shares) to raise the capital that is needed.

C Corporation

The C Corp is similar to the S Corp except for it’s taxation. You definitely do not want to go this route being a home business owner. Companies do not cover from S to C Corp until they have to. It’s usually when they pass the 99 shareholder threshold or require more than one class of stock.

To form an S or C corporation the proper documents, typically called the articles of incorporation, must be filed with the appropriate state agency and the necessary state filing fees paid. Many expenses are deductable with a Corporation. You can also be ride of the self-employment taxes when having a corporation.

This form is more for the companies that will have hundreds of employees and unlimited shareholders. Not favorable for a home based business.

LLC

The last business type that I will be comparing is the Limited Liability Company or LLC. The LLC has a few of the big benefits of the S Corp. There is pass-through taxation and limited liability. The appropriate documents with the LLC are called the articles of organization and also need to be filed with the proper agency in your state of filing.

LLCs legally exist as it’s own entity just as corporations do, therefore the owners typically are not help responsible for the companies debts and liabilities. LLCs are not limited on the number of members that it may have and is free to structure its management hierarchy however they chose.

If you find yourself leaning towards an LLC, keep in mind that they are more expensive to form than sole-proprietorships and ownership is harder to transfer than corporations. And for the unorganized folks…less annual paperwork.
I have pretty much given you the low-down on the most popular business entities for home based business owners. Think long and hard about which is best for you, for changing the business type later on requires a lot of work.

For a reliable business filing company and more information on the different business entities, you can check out BizFilings.com

July 11th, 2007