Incorporating Your Home Business
Should You Make Your Business at Home a Corporation?
Incorporating a home business is a decision to be made carefully, since a home business corporation has both advantages and disadvantages.
Any home business owner that recognizes the value of serious business planning should also be willing to give some thought to business organization. Home businesses usually start out as sole proprietorships, but there may come a time when restructuring makes sense. Incorporating your home business could be a good idea that leads to more liability protection and less taxes. Corporations can also mean more paperwork.
Corporations vs. Partnerships for Home Business
Although businesses can also be organized as partnerships, they don’t make a lot of sense for work-at-home businesses, since in most cases the most logical partners already have some kind of written agreement, anything from domestic partnership to a marriage certificate. If you’re going to reorganize your home business, incorporating makes the most sense.
According to StartUpBiz.com, businesses can be organized in six different ways, but these are all variations on sole proprietorship, partnership, and corporation. Having already dispensed with partnerships as unnecessary for a home business, how can a business owner recognize when it is time to incorporate a home business?
Effects of Incorporating Your Home Business
Corporations are separate legal entities, so incorporating your small business will have several different effects:
- Liability: A home business corporation protects its shareholders from liability for debts and otherwise, unlike a sole proprietorship, in which the home business owner is completely liable for anything that happens in the home business’ name - the business and the owner are one and the same. A corporation is a separate legal entity from its shareholders.
- Taxes: Incorporated home businesses are taxed at a corporate rate, and have different deductions. Shareholders are taxed on any dividends that they receive.
- Flexibility: there is frequently additional paperwork needed for a home business corporation, including a separate tax return and periodic filings with the State. In the case of a sole proprietorship which incorporates, however, these additional requirements usually do not slow down the decision-making process, unless the small business owner decides to add a large Board of Directors and other layers of bureacracy. These are not necessary for a home business.
- Durability: Incorporated home businesses will outlive their owners by design. This will have an effect on estate taxes and business succession strategies. A home business corporation can't just stop doing business like other home businesses - it must be formally dissolved.
I'm Ready to Incorporate My Home Business
The laws about corporations change frequently and vary from jurisdiction to jurisdiction. No home business owner should decide to incorporate his home business without consulting his business advisors, which may include an accountant, an attorney, and a counselor from the Small Business Administration. Those advisors should be able to help decide if incorporating a small business makes sense right now, and which corporate structure is the best choice, be it a C-Corp, S-Corp, LLC, LLP, PLLC, PC, or any of a number of others. This decision needs to weigh tax advantages and legal protections against greater complexity and regulation. Careful planning is best for deciding when, if ever, to incorporate a home business.
