Consulting a tax expert for individual advice should be considered a priority above any advice found on the Internet. General suggestions here will get people on the right road, knowing what questions to ask a tax preparer about their specific business advantages and guidelines.
Sole Proprietorship, Limited Liability Company or Corporation
The first item of business when planning a home based business is deciding on the business structure. Many options are available:
- Sole Proprietorship
- Partnership
- Limited Liability Company (LLC)
- S or C Corporation
- Non Profit Corporation
Corporate and LLC structures are considered an entity of their own by the legal system. This means that a corporation pays its own taxes and be represented in a court of law the same as any individual as long as board meetings and other record keeping is followed as required by corporate laws. One of the primary reasons these structures are used is to protect the assets of the corporation and of the individual owners.
Sole Proprietorships and Partnerships on the other hand do not have the same rights of individuality. Taxes are filed along with the personal taxes of the individual owner(s). If one of these structures are sued in court there is a high probability that the owners will he held financially responsible in the suit.
The rule of thumb is if the company owners are purchasing expensive equipment or real estate during the business start-up or have large personal financial equity then a corporation would be the best choice. If the startup is a small home-based business with low investment value and the owners do not have a high personal net-worth, then the need to incorporate is reduced.
For Profit or Non-Profit; Tax Implications and Business Purpose
Depending on the activity of a business will offer the option of setting up a business to be a profitable or non-profit organization. When selling a product or service typically a for profit is the way to go. However when the activities of a business will benefit a community, church, underserved demographic of individuals or charity the non-profit model may well be the best choice.
To define properly: a non-profit status in the United States is given by the state, normally the secretary of state office. Filing with the state is not the end of the process. It is expected that non-profit organizations also file for a tax exempt status with the IRS as well. While the filing with most states only takes a few weeks, the IRS tax exempt status can take between eight and twelve months. People who make donations to a non-profit organization will not be able to deduct the donation from their taxes unless the organization is also tax exempt.
Home vs Big Business: Consider - Employees, Payroll, Family, Friends and Governing Board
When starting a home based business individuals need to take time to consider which structure will provide them with the best asset protection and flexibility. Keeping corporate records can become a headache for smaller businesses. However, it is not very difficult to incorporate a small business at a later date.
Most states require an annual corporate tax (i.e. California’s annual tax as of January 2010 was $800). If a small business is expected to loose money for the first few years of operation while it builds a clientele, $800 more per year could be difficult to pay.
Married couple partnerships have their own set of prerequisite discussions and agreements to consider before the inception of the business. Research, investigate and evaluate all options before making a final decision on a company structure.
Source:
Registering Your Business Name, Nolo Press (Accessed 3-14-2010)
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