Choosing a Corporate Structure
Incorporating Home Businesses Can Make Working at Home Easier
Ready to make the plunge and incorporate your home business? Learn the different corporate forms to make the transition easy for your home-based business.
If you’ve been considering incorporating your home business, knowing more about the various types of corporations you can choose will be helpful. You're taking your home business seriously and planning for the future by incorporating. Not every corporation type is appropriate for a home business, and knowing the advantages of each corporate form will make deciding how to incorporate much easier. This discussion focuses on companies in the United States, but the basic principles may apply elsewhere in the world.
Should I Incorporate My Home Business?
This is a question more easily answered in the discussion on if you should incorporate your home business, which simplified the different business forms into variations on sole proprietorship, partnership, and corporation. This can be whittled down even more with the question: is your home business owned by people directly or indirectly (that is, is it owned by humans or other companies)? Each of the corporate forms creates a separate, legal entity that is, legally, the business. Some forms tax the home business in different ways, and some address liability differently. They all would require your home business to file a separate tax return.
Incorporating is a step up from being self employed, at least on paper. Instead of an owner's draw the business owner would have to be paid a salary to get money above and beyond reimbursed expenses. This is more complicated than just keeping a separate bank account, and that complexity may be a good reason to avoid incorporating a home business.
What Corporate Form Should a Home Business Use?
Different corporate structures suit different needs:
- C Corporations include publicly-traded companies. The home business pays taxes as a corporation and its shareholders pay taxes on dividends. The so-called “corporate veil” protects the shareholders from being sued. It requires mucho paperwork, including its own tax return, and is not the best choice for a small home business.
- S Corporations are a bit simpler for taxes: the home business files an informational return, but the shareholders report the income or loss as personal income. This means that some of the more sophisticated tax avoidance strategies aren’t possible. The number of shareholders and who they can be is also limited in an S Corp, so it can be a barrier to getting investment capital. Both S and C Corporations can only be dissolved through filing the appropriate paperwork.
- Professional Corporations are often home businesses, though they might not think of it that way. A PC can only be formed by licensed professionals of a certain kind, such as doctors, lawyers, or architects. It allows them the autonomy to serve their clients while protecting their assets with a corporation.
- Limited Liability Company (LLC)is a hybrid of corporations and partnerships. The filing fees are often less than for corporations, and members may declare if the LLC pays its own taxes, or the members pay them all, like in an S Corp. Its flexibility makes it one of the most attractive options for home business incorporation.
Picking Your Home Business Corporation
In all, creating a C Corporation is the most expensive route to go. An LLC is cheap and easy, and often the best choice for a home business, according to Judith McQuown in her book Inc. Yourself (Career Press, 2004). Each of the structures limits the shareholder or member in terms of liability for debts and lawsuits, and in many cases the home business owner can file paperwork to change the corporate structure later on if circumstances change. Incorporating your home business is a big step, so there’s no need to get overly complicated about it.
It is always important to engage in smart business planning, which includes getting advice from trusted advisors and avoiding scams that target your home business. An excellent resource for any home business owner in the United States is the Small Business Adminstration, which has excellent articles on business structures.
