You’ve purchased your business opportunity, distributorship, or small franchise, and now you plan to operate it from your home. You’ve found your source of capital, you understand your business market sector, you understand your local zoning laws, you understand how to market your overall business and you’ve assessed what skills are needed to operate your new venture. In addition, you’ve established a defined area for your business and even purchased some basic office technology to aid you in your new mission. The next step often eludes many as they immediately delve into “making money” before taking care of some basic organizational key elements that should not be overlooked. In fact, taking the time now can help you prevent some serious headaches down the road so read on.
Asking yourself some basic questions about legal and taxation issues will help get your new home-based business organized right out the gate. Let's start with taxes and insurance.
Heaven forbid, but you need to think about what could go wrong if you were no longer able to run your business? Addressing these issues early on is essential so that you won’t have any serious problems haunting you down the road. Ask yourself what type of organization will best minimize taxation of the business? Understanding the basics will aid you in the process. First, the structure of your new home-based business depends largely on the type of business you’ll be engaged in. Determine if there will be any owners and if so, how many? Are there any investors and if so, knowing how to handle your tax and liability issues will help maximize profits and minimize any potential pitfalls. Furthermore, ask yourself how much personal responsibility you should take on for business debts and liabilities. What would happen if you were suddenly unable to run or manage your home-based business? Your answers will assist you in molding what type of business structure you decide to set up and help map out a plan to achieve your immediate goals and long-term goals.
The most basic types of business structure is a ‘Sole Proprietorship’ that is owned and operated by one person. It is the most basic and least expensive business structure to develop. This type of business structure affords you the least amount of personal security should the business fail or if you’re unable to operate the home-based business for any reason. Basically, if for any reason the business is sued you will be personally liable in almost all cases. This includes your property, personal assets and the like could all be put into jeopardy. So having said that, running out and getting that ultra-cheap business license might not be so cheap in the very end.
A ‘General Partnership’ is a legal business relationship in which two or more persons agree to share ownership and management of a business. With a general partnership, you can pool capital and resources of two or more people. A General Partnership is quite easy to set up and needs no special registration (except for any trade names the partners may use). If you select this route seek legal advice from an attorney who can draw up an agreement between all parties and identify everyone’s liability and roles within the business. The law does not require this but it’s a wise step to take both from an organizational and legal standpoint. As with a Sole Proprietorship, the home-based business liabilities extend to personal assets of each of the general partners in most cases. You can also look into a ‘Limited Partnership’. If you plan to seek more funds this might be a better option to consider.
Next, a ‘Corporation’ is a great way to go and is a separate legal entity from its owners and shareholders. It can make contracts, be liable for any obligations, and pay taxes on earnings. Basically, it is a legal "person." There are two types of corporations, the ‘S corporation’ and the ‘C Corporation’. The tax implications, cost, liability and other factors vary greatly here so do your homework.
Last is the ‘The Limited Liability Company' (LLC) and it’s most often a home-business owner’s best option. The Limited Liability Company combines some of the most sought after features of the S corporation and the partnership forms of business. LLC’s enjoy the benefits of limited liability associated with S corporations, together with the flexibility of partnerships in terms of taxation and the types of owners the business can utilize.
Turning to a qualified lawyer, tax accountant and other professionals for advice is a really smart step before you start trying to make money. If you can’t afford a top-notch CPA or legal advisor there are various self-help aids some of which are completely free, to help get you started. You might also want to read our article that details ways to structure your home-based business:
SBA, Management Aids for Small Manufacturers No. 80, January 1966.
Tax Guide for Small Business. Internal Revenue Service Publication, No. 334