| Your choice of whether your business should be a | | | | The unlimited liability that applies to sole proprietorships |
| proprietorship, a partnership or a corporation can be | | | | is even worse for partnerships. As a partner, you are |
| important for many reasons. Each has advantages | | | | responsible not only for your own business debts, but |
| and disadvantages depending on the type of activity | | | | for those of your partners as well. Should they incur |
| you are engaged in. | | | | debts or legal judgments against the business, you |
| Part of keeping your home-based business legal | | | | could be held legally responsible for them. Disputes |
| involves choosing the legal structure for it: sole | | | | among partners can be a problem, too. |
| proprietorship, partnership, or corporation. Aside from | | | | Unless you and your partners see eye to eye on how |
| being necessary for government reporting and tax | | | | the business should be run and what it should |
| purposes, this can enable your business to operate | | | | accomplish, you are in for trouble. |
| more efficiently. | | | | However, a partnership is generally the least advisable |
| Since each legal form has its own unique | | | | way to go. It requires filing a separate partnership tax |
| characteristics, your goal is to choose the form that | | | | return, does not carry liability protection for general |
| works best for you. | | | | partners, and can lead into legal and personal disputes. |
| Sole Proprietorship A business owned by one person, | | | | A corporate form of ownership is generally recognized |
| who is entitled to all of its profits and responsible for all | | | | as preferable over partnership, because it can serve |
| of its debts, is considered a sole proprietorship. This | | | | the same purpose while offering a cleaner and better |
| legal form is the simplest, providing maximum control | | | | protected structure for the owners. |
| and minimum government interference. Currently used | | | | Corporation A corporation differs from the other legal |
| by more than 75 percent of all businesses, it is often | | | | forms of business in that the law regards it as an |
| the suggested way for a new business that does not | | | | artificial being possessing the same rights and |
| carry great personal liability threats. The owner simply | | | | responsibilities as a person. This means that, unlike sole |
| needs to secure the necessary licenses, tax | | | | proprietorships or partnerships, it has an existence |
| identification numbers, and certifications in his or her | | | | separate from its owners. It has all the legal rights of |
| name, and you are now in business! The main | | | | an individual in regards to conducting commercial |
| advantages that differentiate the sole proprietorship | | | | activity -- it can sue, be sued, own property, sell |
| from the other legal forms are (1) the ease with which | | | | property, and sell the rights of ownership in the form of |
| it can be started, (2) the owner's freedom to make | | | | exchanging stock for money. |
| decisions, and (3) the distribution of profits (owner | | | | As a result, the corporation offers some unique |
| takes all). | | | | advantages. These include (1) limited liability: owners are |
| Still, the sole proprietorship is not without | | | | not personally responsible for the debts of the |
| disadvantages, the most serious of which is its | | | | business, (2) the ability to raise capital by selling shares |
| unlimited liability. As a sole proprietor, you are | | | | of stock, and (3) easy transfer of ownership from one |
| responsible for all business debts. Should these exceed | | | | individual to another. Plus, unlike the sole proprietorship |
| the assets of your business, your creditors can claim | | | | and partnership, the corporation has "unlimited life" and |
| your personal assets--home, automobile, savings | | | | thus the potential to outlive its original owners. |
| account, and investments. Sole proprietorships also | | | | The main disadvantage of the corporate form can be |
| tend to have more difficulty obtaining capital and | | | | summed up in two words: taxation and complexity. In |
| holding on to key employees. This stems from the fact | | | | what amounts to double taxation, you must pay taxes |
| that sole proprietorships generally have fewer | | | | on both the income the corporation earns and the |
| resources and offer less opportunity for job | | | | income you earn as an individual. |
| advancement. Thus, anyone who chooses the sole | | | | Along with this, corporations are required to pay an |
| proprietorship should be prepared to be a generalist, | | | | annual tax on all outstanding shares of stock. Given its |
| performing a variety of functions, from accounting to | | | | complexity, a corporation is both more difficult and |
| advertising. | | | | more expensive to start than are the sole |
| Partnership A business owned by two or more people, | | | | proprietorship and the partnership. In order to form a |
| who agree to share in its profits, is considered a | | | | corporation, you must be granted a charter by the |
| partnership. Like the sole proprietorship, it is easy to | | | | state in which your home-based business is located. |
| start and the red tape involved is usually minimal. | | | | For a small business the cost of incorporating usually |
| The tax structure is the same as proprietorship except | | | | ranges from $500 to $1,500. This includes the costs for |
| in the profits and losses of the partnership are divided | | | | legal assistance in drawing up your charter, state |
| by an agreed percentage by the partners. | | | | incorporation fees, and the purchase of record books |
| The main advantages of the partnership form are that | | | | and stock certificates. And, since corporations are |
| the business can (1) draw on the skills and abilities of | | | | subject to closer regulation by the government, the |
| each partner, (2) offer employees the opportunity to | | | | owners must bear the ongoing cost of preparing and |
| become partners, and (3) utilize the partners' combined | | | | filing state and federal reports. |
| financial resources. | | | | S Corporation If you are interested in forming a |
| However, for your own protection, it is advisable to | | | | corporation, but hesitate to do so because of the |
| have a written partnership agreement that will spell out | | | | double taxation, there is a way to avoid it. You can do |
| the specifics of the agreement. This should state (1) | | | | this by making your business an S corporation. |
| each partner's rights and responsibilities, (2) the amount | | | | The Internal Revenue Service permits this type of |
| of capital each partner is investing in the business, (3) | | | | corporation to be taxed as a partnership rather than a |
| the distribution of profits, (4) what happens if a partner | | | | corporation. |
| joins or leaves the business, and (5) how the assets | | | | However, in order to qualify for S status, your business |
| are to be divided if the business is discontinued. Things | | | | must meet the specific requirements set forth by the |
| have a way of changing and people forgetting over | | | | IRS. These include limits on (1) the number and type of |
| time, so it is essential that there be a signed document | | | | shareholders in the business, (2) the stock that is |
| that all abide by. | | | | issued, (3) the corporation's sources of revenues. |
| Partnerships also have their share of disadvantages. | | | | |