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Small Businesses

The Small Business Association has announced that an astonishing 52% of all businesses in this country are home based and that in 2005 they accounted for 10% of the national economy’s total receipts. Imagine- there are 8,500 home based business start-ups daily! American business, lifestyle and economics have made a great circle. Before the Industrial Revolution, most families lived and worked on a farm. Then the masses migrated to factories and offices. Now due to advanced technology, changing lifestyle and mores with transportation challenges and complications such as commuting and overcrowding, we see a trend where Americans are returning to and clamoring for a work from home scenario.

Before the 1930’s and the advent of the New Deal, the administrative machinations for running the family business were no where near as complex and far reaching as they are today with our puzzling tax codes, business regulation and legal complications. In those good old days, if you wanted to sell milk out of the family farm barn door, you just did it. Today we are fined, sued, blackballed, and held liable and maybe arrested.

So, in starting a home based business, like it or not, you are going to have to give some real thought to which type of business structure fits your needs. There are several legally binding business models; following is a general brief on six.

A sole proprietorship is the easiest and most common. You reap all the profits and are responsible for the costs, and debts. The start- up cost is low, administrative and legal restrictions are minimal, and all taxes are paid as personal income. The downside is that the sole proprietor is also liable for any actions filed against the company.

A general partnership shares many characteristics of a sole proprietorship except that two or more share equal parts profit, loss, tax responsibility and liability. Many husband and wife teams form this type arrangement due to the proposition that married couples can easily compromise on many business related issues. For others, or perhaps for any, it may be good practice to draft legal papers outlining binding specifics in regards to who does what, where, when, and why.

A limited partnership differs from a general in that one partner is designated as being the general partner therefore garnering more authority, control and responsibility. Usually that means the controlling partner also shares a larger burden of the liabilities, and perhaps earns more of the profits. Limited partnerships work well when one or more of the partners wish to keep a lower profile within the business.

Limited Liability Companies are a popular arrangement for many start-up businesses. L.L.C.’s offer single taxation benefits, like the previous arrangements. But cost more to start, are more complex and require additional legal guardianship. The arrangement’s primary advantage is that the owner or partners do not incur personal liability. Instead, any such liabilities are the responsibility of the company. If sued, they can come after your business but not your house, car or first-born child.

If you wish to incorporate, there are two types of corporation models available, the C-Corporation and the S- Corporation. The C- Corporation is a legally separate business entity and is subject to corporate taxes. Shares of stock can be bought and sold to raise capital, and the shareholders receive dividends from the stock and pay taxes on the any income derived from the dividends. They also enjoy limited liability.

S-Corporations are structured the same as a C-corp., except that the shareholders opt out of paying federal corporate income taxes , instead paying person income taxes on all income including, profits, credits and deductions.

Which is best for your business? Unless you are a whiz-bang with business start-ups, it is best to seek advice from a trusted professional. Some places you may wish to query are the Small Business Association, your local Chamber of Commerce, the I.R.S. or if you know one, a trustworthy attorney.

Sources referred to in this article:

American Small Business Association

Posted:Thursday, September 04, 2008