Betty sells bras – nursing bras to be exact. Betty’s been doing it for about a year, and is making a pretty good go at it. She’s starting to expand her line, and has considered adding on to her home to enlarge her home office.
Jeff is a career coach. 6 months in and he’s tripled his client base in the past 2 months alone. He’s looking at forming some strategic partnerships, and already has several inquires about licensing his products.
Betty went the LLC (limited liability company) route from the beginning. Her friend and attorney recommend it for the ease and security it offered. Jeff never thought about a structure, and became a sole proprietor by default. Now he’s considering forming an S Corp.
Now, I’m using Betty and Jeff as composites of the many home-based business owners I’ve worked with and talked to (and both are based on real people) – but the issues are real, common, and involve…
How to Structure a Home-Based Business
There are lots of opinions on what is the best structure for a small business. Doing a Google search for “home-based business structure” returns about 1,620,000 hits, as of this writing. Most of it is confusing. Your attorney and tax advisor will tell you one thing, and successful peers will tell you another. So what do you do?
First off, I’m not a lawyer (I don’t even play one on TV). I’m just a guy who’s been doing this for 14+ years, and worked with lots and lots of other successful home-based business owners. With that in mind, here are 4 things you should consider (that often aren’t) when exploring the best structure for your home-based business.
1. Simplicity
The easiest and most common way to structure a home-based business is a sole proprietorship. Essentially, you just start working. You may need a fictitious name filing or a business license depending on what type of business you’re in, but it’s all pretty basic. A lot of folks get caught up in all the structure stuff before they’ve even thought out many of the other aspects of their business. Even if you plan to move to a more formal structure, it’s often best just to start as a sole prop to get up and going. I always vote for simple when you’re starting out.
2. Scaling Up, Scaling Back
An important thing to keep in mind is that it’s fairly easy (though possibly costly) to move from a sole proprietor to an LLC or S Corp. But going back is not. This is one thing I’ve heard consistently from legal and tax experts – that doing this can throw up lots of flags. If you decide to form an LLC or S Corp, make sure you think it through, and plan to stick with it.
3. Oh, That Veil Thing
One thing you’ll hear a lot about regarding the protection an LLC or S Corp offers is “piercing the corporate veil.” There is often some confusion from home business owners about the protection a legal entity offers. If you set one up, then do nothing to maintain it, you can still be personably liable. You need to run it as a corporate entity – meetings, minutes, records, annual reports – or you run the risk of getting pierced in the veil.
You are also liable for your own actions regardless. You can’t run over your neighbor’s prized begonias with your corporate vehicle and claim to be protected by your corporate entity. It’s not as all-encompassing as many believe. This is a simple, not a lawyer explanation, but you get the gist. Your attorney can explain it better (but maybe not as colorfully).
4. If You Need Real Advice, Talk to an Expert
Many of the folks I work with already have a pretty good idea of what approach they want to take. But if you are confused, please talk to a lawyer or tax advisor. I’ve met so many folks who got their advice from peer groups or online forums. That’s actually a great place to start. Getting advice from someone who’s done it makes sense. But because there are so many variables, and your needs may be unique, it’s worth it to talk to an expert.
Choosing a structure for your business seems like a monumental task, but in reality it’s not. I’ve found that it’s actually not that big of a deal at all. Starting off as a simple sole prop, or forming an elaborate corporate body won’t guarantee success or failure. The key to all of this is to actually do something. Don’t let all this structure stuff cause analysis paralysis. If you never get up and going, you won’t need a structure, anyway.
What a fresh design! I love it. I have been working from home for 10 years as a web designer. I began my business as a sole proprietor and then changed to an S-corp in about year 5. I am not sure if it has been beneficial or not – I think I would have been fine either way.
Hi Char – Thanks for dropping by and the compliments on the design.
I’ve found that most of the home-based business folks I work with have a similar story. Starting as a sole prop is so easy – most opt to go that way. Then over time – either for tax reasons, security, or feeling that they’ve somehow “grown- up” they choose a formal structure. But many choose to stay as sole props due to simplicity, and not seeing any real benefit in changing.