How To Pick a Business Structure

It seems you are moving along at a decent pace as you get your home business off the ground. You’ve created a business plan, figured out the perfect business name, and even jumped the gun to print 100 t-shirts with your new business logo. But now you realize you have avoided the official stuff for too long and need to decide what your business will be in the eyes of Uncle Sam. It’s time to decide on an official business structure!

Don’t freak out! Grab a Kleenex and wipe the perspiration beading up on your forehead. Selecting the right business identity is important and has tax and other ramifications, but reviewing your business objectives, researching your options and consulting a tax expert will make it easy to select the right business structure for your home business.

Here are some basics to think about:
How risky is your business?

How much risk am I taking with this business? That is the first and most important question you want to ask yourself. If your business is going to be involved in scooping up real estate property or buying a bunch of expensive equipment or inventory, that could hold a lot of personal liability for you. Another risky situation could be if you were planning to share ownership with different individuals and each of you contributed different amounts of investment capital or time involvement. Where relevant, you’ll want to create a structure that limits your personal liability. Only a corporation or a limited liability company (LLC) will offer you this protection.

On the other hand, a sole proprietorship or partnership is designed specifically as the name implies -- for a single individual or pair of two to do business. All the profits and losses of the business rest solely on the owner(s). These are the least formal and complicated of the business structures. If you are leaning this direction, but worry that you need the protection of a corporation or an LLC to avoid the minuscule likelihood of getting sued, consider your business. For instance, if you are selling products out of your home or offering some type of consulting service, it is rare that you would screw-up badly enough to get your pants sued off. This is why approximately 80% of home-based businesses are set-up as sole proprietors.
Tax Ramifications

If you are looking for the least amount of tax filing complications, sole proprietorships, partnerships or LLCs fall under this category. Each of these structures are set up so that the profits and losses pass through the business to the owner(s), who then report their share of the profits or losses on their personal income tax returns using a Schedule C.

A corporation is considered a distinctly separate entity and requires a separate tax return from that of its owners. Taxation of a corporation is more complicated, but corporations are often taxed at a lower rate and could result in savings based off its unique situation. Again, this is a good place to consult a tax accountant if you are interested in learning how a corporation would affect your business and personal taxes.
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