How to choose the right structure for a home-based business

Running a business from the comfort of your own home is a dream for many entrepreneurs, but the most daunting part of it is picking its structure. This choice influences legal obligations, capacity for direction and necessities when making big moves, such as opening a US business bank account for non residents.

To help making these big decisions, here’s some information about what a business owner must know.

What is affected by the business structure?

As mentioned, the choice of business structure for a home-based business can affect many aspects of how it’s run. These are the most critical factors to consider:

• Taxes: Sole proprietorships and partnerships are taxed as pass-through entities, meaning the business’s income is taxed on the owner’s personal income tax return. It can benefit small businesses with low profits but will backfire if the owner has a high personal income tax rate. On the other hand, corporations are taxed separately from their owners, letting them enjoy more of their profits.
• Liability: Sole proprietorships and partnerships offer no liability protection. If the business is sued, the owner’s personal assets could be at risk. That can be contrasted with corporations, where the owner’s personal assets are only at risk if the business is sued for its own negligence or misconduct.
• Fundraising: Corporations are generally seen as more credible than sole proprietorships or partnerships, making raising money from investors easier.
• Paperwork: The business structure chosen will also affect the amount of paperwork it’s necessary to file. Sole proprietorships and partnerships have fewer paperwork requirements than corporations.

Using these aspects as criteria for finding the ideal business structure is helpful. With that in mind, let’s explore some of the popular options.

Some of the best picks

Here’s a quick breakdown of the most popular choices and what they offer:

1. Sole proprietorship

A sole proprietorship is the simplest structure, where the business and its owner are essentially one entity. All profits, losses and responsibilities fall on the owner.

• Pros: Easy setup, full control, minimal paperwork and direct tax reporting
• Cons: Unlimited personal liability, difficulty raising capital and limited growth potential

2. Partnership

This model involves two or more individuals sharing the business’s responsibilities, profits and losses.

• Pros: Shared workload, diverse skills and potential for growth with additional partners
• Cons: Shared profits, potential for conflicts and personal liability for the actions of partners

3. Limited liability company (LLC)

A limited liability company combines a partnership’s flexibility with a corporation’s limited liability. Owners are referred to as members.

• Pros: Limited personal liability, flexible management structure and potential tax benefits
• Cons: Complexity in some regions, potential self-employment taxes and less established credibility than corporations

4. Corporation

This is a separate legal entity from its owners, who are better known as shareholders. It requires formalities such as regular meetings and a board of directors.

• Pros: Limited personal liability, potential for substantial growth and credibility in the eyes of investors
• Cons: Complex setup, higher administrative costs and double taxation (unless structured as an S Corporation)

5. Freelancer/independent contractor

Often used for service-based businesses, freelancers are self-employed individuals who offer their skills to clients.

• Pros: Flexibility, low overhead costs and potential for high income
• Cons: Inconsistent income, lack of benefits and limited scalability

Not sure which to choose?

If the picture is still uncertain, it’s worth considering the following steps:

• Consult a professional: Seek advice from a business attorney, accountant or financial advisor, who can evaluate the situation and provide tailored recommendations.
• Evaluate long-term goals: Consider the business’s growth potential, financial projections and personal risk tolerance. A structure that suits current needs might not scale as the business expands.
• Do market research: Analyse the industry and competitors to understand common business structures within the sector. This can provide insights into what works best for the relevant type of business.
• Review local regulations: Different jurisdictions have varying regulations and tax implications. Research them for each potential structure in the area.
• Consider a hybrid approach: In some cases, a combination of structures might be the best solution. For instance, a sole proprietorship or LLC can be transitioned to a corporation as the business grows.

Careful consideration

A home-based enterprise’s structure will affect the obstacles and opportunities it gains going forward. Researching the options, seeking professional advice and evaluating the business’s needs should keep things on track.

The editorial unit