Choosing Your Business Structure for Your Home-Based Business

business structure

Some of today’s most successful and dynamic corporations started as a home-based business. Could yours be next? Apple Computer, Amazon, Mary Kay Cosmetics and many others started in the home. If you have a good idea, drive and passion for your business by all means, starts one. However before you do, it is important to understand how to setup and manage your business for long-term success. Below are just a few of the reasons you need an accountant to help get you start off on the right foot and why existing home-based businesses need the counsel of a professional accountant.

Business Structures Available For Home-Based Businesses

One of the most important things when starting or growing your home-based business is the IRS/legal designation for your business. Much like the complicated tax code, it is advised that prior to selecting a structure, you consult with an accountant or attorney. As your business grows, you may need to consider changing the structure of your business. Below are the major legal structures available.

  • Sole Proprietor: The sole proprietor designation is designed for an individual that owns an unincorporated business. This is one of the easiest business organizations to open and the benefit is that it allows for the business owner to be in complete managerial control. However, the sole proprietor is personally liable for all the financial obligations of the business. While it is the most popular, it may not be the right choice for you.
  • Partnership: A partnership is a structure that requires two or more people that agree to share in the losses and the profits of the organization. The big advantage of this structure is that the partnership does not bear the tax burden; the profit and losses are reported on each partner’s individual income tax returns. The disadvantage of a partnership structure is that each partners is personally liable for the debts and obligations of the business.
  • Corporation: This structure allows for the corporation to be taxed and held responsible for any legal actions and debts. The
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    primary benefit of selecting corporation as your business structure is that it insulates owners from personal liability. While this is an important consideration, the corporation also comes with extensive record keeping and reporting. An “S” corporation may be more appropriate for many small business owners. Check with an accountant or an attorney that specializes in small business structuring.

  • Limited Liability Company: The Limited Liability Company (LLC) is a part partnership and part corporation. It allows owners to take advantage of the best aspects of each structure. Profits and losses can be passed to owners of the company, without taxation of the business, and the owners of the business are safeguarded from personal liability of debts, and lawsuits.

Decision Making Time

When the time comes to select your business’ structure, it is important to take the following into consideration.

  • Legal Liability: It is important to discuss with your accountant the level of visibility and legal liability you are willing to take.
  • Taxes: Each of the legal business structures above has its advantages and disadvantages for small business owners. It is essential to weigh all of your options in order to maximize your profits. Consult with Barry Bandler Accounting & Tax Services to determine the right structure for you.
  • Cost of Formation: The above legal business structures have a wide range of costs associated with the setup and maintenance. Record keeping and reporting also varies widely. Be sure that the business structure you select makes sense for your start-up budget.

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