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