There are 4 form of businesses to legally form; sole proprietorship, partnership, limited liability company (L.L.C.) and corporations (corp or inc). Which type will be best for your home-based business? Entertain Near You will give some information on all 4 and will help select which one will be best for which business. Just remember, whichever is selected on day one, can be changed later on once the best have been more established.
Most home-base businesses will go under the Sole Proprietorship form, which means there will be only one owner. Sole proprietor will use form 1040 when the do their business and personal income taxes. When someone starts a business and do not organize it in a business way, it will be considered a sole proprietorship. This can be changed to one of the other 3, once the business has started and conducted some business. It also takes more work to create a partnership, limited liability company (L.L.C.), or corporation (inc.). An attorney should be consulted when an owner decides to make a change. Sole proprietors are 100% liability for anything that happens from the business.
If there will be more than one owner, a partnership would be formed. When a partnership is formed, there should be an agreed-upon agreement between all parties involved. This agreement is called A Partnership Agreement which has to be registered with the state, and it would be best if it was written or typed up by an attorney. A partnership are usually formed with some partners doing more of the sales and paperwork, while the other partners does more of the labor. Some are equally involved in both, but a Partnership Agreement will spell out what each partner responsibility are and what are each percentage of the profits. A handshake can make it a contract but when things get bad, having everything typed up on paper will be best, and it would be best if the partnership agreement was typed up by an attorney or at least looked at by an attorney of each partner. All partners will be liable for the percentage typed on the agreement, which could include their personal property. If a partner wants to limited on their personal liability, they could be a limited partner of the company and signed the partnership agreement to become only a limited partner. Limited partners profit percentage are usually smaller than the rest of the partners, but their personal property will be very small or even avoided. The limited partner probably will have to pay the franchise fee to the state, when it is registered.
The 3rd form is called Limited Liability Company (L.L.C.), which is the newest type of formation. It is a mixer of a partnership and corporation. It feels more like a partnership but limits the liability of the owners as a corporation does. When a LLC is formed, the business owners have to register the articles of the organization with the state the business is in. Each member must have an operating agreement that defines every owners’ relationship within the business. An attorney will need to draw up such an agreement to file. Every member of the L.L.C. will have limited liability of their personal property, in case of a business liability.
The last form is Corporation (corp. or inc). This type of form most home-based business will not go under, but it is wise to have knowledge of one. Google and Facebook did not grow so big on day 1. Corporations are more complex to form. Corporations limit the liability of all the owners. A double taxation can happen on their earnings, unless it is an S Corporation, which will have to be explained in another article. One of the main pluses of starting a corporation would be to raise more capital (money) by selling corporate stocks or bonds. There are also a variety of insurances to come with it and profit-sharing. Some of the minuses would be double taxation and it requires a lot of paperwork to start. An attorney would need to file the paperwork and will require more start up capital. Each state’s requirements may vary.
These are the 4 types of businesses to form: Sole Proprietor, Partnership, Limit Liability Company, and Corporation. Choose the one best fit for the business, but remember that the type can be changed later on with the business grows. It would be best to have an attorney draw up or even look at the Partnership Agreement and to file the paperwork for a LLC or Inc. Make sure the business owner(s) are covered and have knowledge everything with the formation of the business.