Ten Steps to Starting a Home Based Business: Step 2

Step 2: Establish your Business Entity

You will need to decide how you want to run your business. You can run this as a sole proprietorship, a partnership, or a corporation. Also, a newer option is a Limited Liability Company (LLC). Here I will discuss, briefly, what each type of business is, as well as the pros and cons of each type.

First up, a Sole Proprietorship. What is a Sole Proprietorship? Technically, according to the IRS, “a sole proprietorship is an unincorporated business that is owned by one individual.” This type of business is known as being the simplest form of business to open and to maintain, as it has no existence apart from the owner, the liabilities of the business are the liabilities of the owner. There are a few disadvantages of a sole proprietorship. Mainly, a sole proprietorship could have a hard time raising capital, since shares cannot be sold, and there is not as much of a sense of legitimacy compared to a corporation or an LLC. If there is a problem, such as the business being sued, then in reality, the owner himself/herself is being sued.

A Partnership is really only an option if you have a partner. This is basically the same as a sole proprietorship, except that there are two owners, each of whom has unlimited liability. This can cause problems later, however, should there be any sort of falling out between the partners.

A corporation provides limited liability for its investors, but can be one of the most complicated types of business to set up and maintain, because of tax filing and paperwork requirements. On the other hand, the shareholders are not personally responsible for the business’ debts and financial downfalls. This might be a way to go if you have a lot of personal assets which you wish to protect. There are several types of corporations, and one popular type is an “S” corporation. This way, the corporation is treated as a partnership for tax purposes, and a regular corporation for all other purposes. Setup fees for forming a corporation can be quite high.

The last, and a somewhat new option for businesses, is the LLC, or Limited Liability Company. It provides most of the liability benefits of a corporation, but in most cases, for paperwork and tax filing purposes, it is treated as a partnership. It’s somewhat like having the best of both worlds. Setup fees for an LLC are also relatively low.