Legal Forms Defined

S u r p r i s e! A large majority of home base businesses are Sole Proprietorship. There are several reasons for this. This is the easiest form and can be least costly. Personally, I find this risky and would be uncomfortable with the arrangement. Again, it depends on your business and personal needs, not mine. This form means that he or she has complete responsibility for the business.

The income from the business is counted with personal income, and the owner accepts all liabilities for the business. If liability extends beyond the business financials, it will fall on the owner. The owner and the business are the same, and little protection separates liability. Taxes are filed (1040), business and personal income, together under the owner. Debts incurred through the business are the same as your personal debt.

Why do so many elect this form? Perhaps one reason is that if one does nothing, than it becomes a Sole Proprietorship through default. The plus to this is the owner has absolute control over the business, the costs are low or not at all, and less government regulations.

You must be aware of zoning, registration, and tax requirements for your location/state/province etc. Overall, if your needs are few and simple, this may be your option.

It is best that you consult an attorney to write up a sole survivor agreement to prevent closing down your business if something happened to you. This will allow your beneficiaries to continue to operate the business, especially if it is successful.

General – if there are two or more owners in your home base business, they equally share the liability, profits and debts of the business, then, this type of partnership may better suit your needs. This is similar to a sole proprietorship, in that, debt and liability goes beyond the business to the owners.

It is highly recommended that this type of entity should have a written partnership agreement drawn up by an attorney. This, at a minimum, outlines the liabilities, responsibilities, the management, and duration of the agreement.

It should be noted that the death, or addition of another partner or a withdrawal of a partner, would legally terminate the agreement and dissolve the partnership. In addition, personal assets may be confiscated to satisfy creditors.

Limited Partnership – this is a form when one or more of the partners had only limited liability. This is if the agreement indicates that his or her involvement is purely financial.

This partner cannot be involved in the operations of the business. If this person gets involved in the decisions of the company, a court may rule the business is a general partnership and that general liabilities apply.

Limited partnerships may continue after the death, or withdrawal of a limited partner. Keep in mind, at least one person must be listed as general because he or she will be the decision maker and will operate the business. Limited partnerships usually require some kind of state licensing and are regulated more than a general partnership.

This is considered a hybrid of both General and Limited Partnership, and Corporations. It gives management the flexibility of a General Partnership but has limited liability like a Corporation. They are protected from personal liability, but taxed as a partnership. This eliminates the double taxation of a corporation. This is less restrictive than a Corporation or S-Corporation.

In most cases, LLC’S have duration of 30 years or less. Any transfer of ownership usually requires the consent of all members. This form is easy to obtain, has tax savings, and affords liability protection. This is rapidly becoming a popular election.

An accountant or lawyer is highly advised as variations and restrictions differ in the U.S. from state to state. Usually, an Article of Organization must be filed with the Secretary of State. Each LLC member must file an operating agreement that outlines and defines the relationship between members and the company.

Corporations are considered a separate legal entity and treated separately from the owners. In most cases, stockholders are exempt from liabilities unless they are involved in criminal activity when conducting corporate business, or if the firm fails to follow by-laws and conducts business outside the limits of the corporation. In these cases the corporate shield can be pierced.

Corporations generally survive their owners. They carry the best business image and provide unlimited protection to stockholders. Growth is enhanced, and the hierarchy and structure is more clearly defined. Capital can be raised by selling stock to investors.

They are taxed at the corporate and stockholder levels. They are more expensive to start, and require more paperwork. They require more regulations and yearly requirements. In the Corporation, the company is subjected to the desires of a board of directors, who represent the stockholders.

It may be wise to include your CPA and attorney in establishing a Corporation. Failure to act properly as a corporation could leave you company with little or no protection. Consulting the proper people may cost more, but is worth it.

“S” Corporation – this is a selection used with many small businesses. It provides the same protection as a corporation but is taxed not exactly like a partnership or proprietorship but similarly.

Major benefits are liability protection, income taxed at the shareholder level, an enhanced business image, losses offset personal income, and overall better tax structure.

In closing, ask yourself where you will be 5 years from now. This will help you determine which legal form to choose.