Do Home-Based Businesses Need a Formation Structure?
According to the U.S. Census Bureau, in just three years, the number of people primarily working from home tripled from 5.7%, or roughly 9 million people, to 17.9%, or 27.6 million people.
While COVID-19 ushered in a massive conversion from in-office employees to remote workers, others left their corporate structures behind, and became self-employed. Depending on the type of business or industry, and the number of employees involved, the question of which business entity is right for these home-based businesses can help define their goals.
What Type of Business Structure is Best for a One-Person Company?
Most individuals who strike out on their own begin their business as a sole proprietorship, which is not technically a business entity.
It is simply a person doing business — either under their name or a fictitious “Doing Business As” (DBA) company name — using their social security number, instead of a Tax ID number. When a home business operates as a sole proprietorship, the owner reports their business income on their individual tax return.
While a sole proprietorship is the simplest and cheapest way to operate a business, it is also the riskiest. Since it is not technically a business entity, the individual’s personal assets are not protected from business liabilities and debts.
A sole proprietorship should only be considered for the simplest, smallest business operation.
Increased Profits or Employee Acquisition Require Increased Business Protection
Once a company, even a one-person business, begins turning a significant profit — or when he or she hires an employee or contractor — asset protection should be the priority.
To ensure your home, bank accounts, and other financial holdings are not at risk from business liabilities and creditors, you should pivot your solo practitioner company to a limited liability company (LLC) or corporation.
What is the Difference Between an LLC and a Corporation?
An LLC is a business structure that protects its owners from personal responsibility for their debts or liabilities. These companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. An LLC is easier to set up than a corporation and provides more flexibility and protection for its investors.
LLCs do not pay taxes on their profits directly. Their profits and losses are passed through to its members, who report them on their individual tax returns.
As a formal business entity, an LLC requires articles of organization to be filed with the state in which the company is formed.
A corporation may be created by an individual, or a group of people with a shared goal, to establish a legal business entity that is separate and distinct from its owners.
Corporations can enter contracts, loan, and borrow money, sue and be sued, hire employees, own assets, and pay taxes. They also operate with limited liability, which means that their shareholders may take part in the profits through dividends and stock appreciation but are not personally liable for the company’s debts.
If you are unsure which type of entity formation structure is right for your at-home business, contact our MLG Business Litigation Group attorneys in Florida and California today at (786) 706-9228 to schedule a free initial consultation.