Following on the recent post about business models, we want to cover an equally important topic: business structures. While business models define how your business will provide goods or services and get revenue, business structures refer to the legal structure chosen for your business. This post covers structures most common to home business, though other business structures exist. Choosing the appropriate structure is important for these reasons:
- Affects the amount of taxes the business will pay
- Personal liability for business-related issues
- Impacts your ability to raise money when starting up a business
- Determines the amount of business forms required by the IRS
- Legal costs associated with starting the business
For home business, three business structures are commonly used: Sole Proprietorships, Partnerships, and Limited Liability Corporations (LLC). Also possible are non-profit organizations and corporations, but these are less common for home business.
Sole Proprietorships
The Sole Proprietorship is the simplest and probably most commonly used business structure for the home business. If one plans to work alone, this structure is probably the best. The tax aspects are appealing: expenses and income from the business are included on your personal 1040 return. Profits or losses are listed on a ‘schedule C’, the net result is entered on the 1040. Sole proprietors must also file a ‘schedule SE’, used to calculate the amount of self employment tax you owe. You must also make estimated tax payments if you expect to owe more than $1000 in federal taxes (with certain provisions). The IRS allows you to make these payments quarterly throughout the year – April, June, September and January.
Pros
- You have complete control over the business, its decisions and direction.
- Taxes are simplified as noted above and included with your own personal income tax return.
- Business earnings are taxed only once, unlike other business structures
- Minimal fees are paperwork is required.
Cons
- You are personally responsible for all business liabilities, potentially putting personal assets at risk to settle lawsuits or creditors.
- Raising start up money is difficult. Most sole proprietors rely on savings, friends or family.
- Only one owner is allowed.
Partnerships
The partnership structure is used if multiple parties are involved with starting and running the business. Two variations of partnerships are used: general partnerships and limited partnerships. In general partnerships, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.[i]
Pros
- Relatively low cost
- Business income reported on individual tax returns
- Easy to start a partnership
- Like a sole proprietorship, no double taxation
Cons
- Business risk and liability as a partner/owner
- More expensive than sole proprietorship
- Finding the right partner or disagreements with partners
Limited Liability Company or LLCs
The LLC structure basically combines a corporate business structure with a limited partnership. An LLC is a separate legal entity where the owners are not responsible for the debts and liabilities of the company. Unlike corporate structures, no stock is issued to shareholders. The LLC is not recognized in all states; check with your accountant or attorney.
Pros
- Flexibility, allows any person to involved with running the company
- Low risk and liability
- No double taxation. Owners/partners only pay taxes on distribution of the LLC’s profits on individual tax returns.
Cons
- Not recognized in all states
- Reporting guidelines are more rigorous
- Difficult to take company public and offer stock, if desired
Other business structures exist including: C Corporations, S Corporations, and non-profit. For the home business, the 3 discussed are the most common and likely best choices to consider.
As always, please check with your accounting and legal professionals for specifics in your state and the best option for your business. Homepreneurs is not an expert in accounting or legal issues and does not represent itself as such. We provide this information for general knowledge.
By Dion D Shaw
Dion D Shaw is the founder and owner of Homepreneurs
Homepreneurs. New Day. New Opportunity.
Disclaimer
Homepreneurs does not endorse nor have any relationships with any of the services listed. Homepreneurs receives no compensation or consideration for its suggestions. Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.
© Homepreneurs 2010 – 2012, All Rights Reserved
Reference
[i] Retrieved from http://www.entrepreneur.com/article/75118. 4/3/2012.
Posted by homepreneurs 
In 1991, Dion Shaw was diagnosed with multiple sclerosis (MS). Over the years, his health has declined, including ongoing vision problems associated with optic neuritis, and doctors now say a stem cell transplant is essential to his well-being and perhaps, survival.
