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Running a home business is the dream of many people. The thought of earning one's living without having to deal with the stresses and pressures of a commute, a boss and company politics is very appealing. Getting a home business off the ground, however, can be a daunting task. There are many issues to consider in setting up a home business. Work space, products, advertising, expenses, and taxes are just some of the issues. One of the biggest issues that will arise is what kind of company you create. Do you want to incorporate or be a sole proprietor?
Should you set your home business up with you as sole proprietor?
With a small home business a sole proprietor is just that. You are the owner, the employer, the boss. You are responsible for self-employment taxes, both Federal and State. These taxes can be fairly high and generally are for a sole proprietor type of business. Figure on putting aside at least 30-40 percent of your gross receipts for taxes. The amount of paperwork and tax reporting is not as demanding as that of a corporation. Also, as a sole proprietor you and your personal assets can be at risk if any legal problems arise in the course of doing business. You risk the possibility of losing your home, cars, and personal assets if a lawsuit does not go your way. Consult your attorney on the possible liability issues.
Should you set up your home business as a corporation?
Setting up a corporation for your home business is a more involved process but can be of a greater benefit to you in the long run. You will need an attorney to draw up the incorporation documents. Generally, this can be done by an attorney for anywhere from $200.00 to $500.00 and up. A chapter sub-S corporation is the structure generally chosen. This is due to the fact that the tax liability is less than with a sole proprietor and the legal liability protection is greater. In a corporation, you can be listed as the president of the corporation. You are, therefore, an employee of your new corporation. You pay federal taxes for Medicare and Social Security on a quarterly basis. But the income taxes are based on what you report as your wages as an employee of the corporation. This is not the same as the actual money you earn. The difference between what your reported wages are and what is actually earned can be classified as dividends on your personal income taxes after deductions for expenses.
Another advantage of setting up a corporation is that generally the corporation is the one that can be held liable in legal difficulties. Only corporate assets are exposed to legal action. Thus, your home, cars and personal assets can enjoy some sense of legal protection. You can strengthen this protection by keeping a corporate bank account and only use the account for business funds. You may write yourself a payroll check from the account, or make tax payments from the account. The vital issue is to never mingle your personal uses of a bank account with the corporate uses of the bank account. Consult your attorney and accountant for further information.
Having a home business can be very rewarding in many ways. You can make it more enjoyable by setting your business up in a way that best fits your needs and goals.
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