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March 2009
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What Type of Business Organization Do You Have?

We are right in the middle of tax season, so we figured this would be a good time to discuss the types of business entities that are available to you as a home business owner.  If you haven’t already made a decision as to what type of business organization you want, this may be a good time to get set up / changed for the current year.  It is too late to do any changing for last year, but this is a whole new year.

There are three types of business organizations that you have to choose from in order to create your business.  The three choices are (1) sole proprietorship, (2) partnership and (3) corporation.

The most common type of business organization for home-based businesses is the sole proprietorship.  This type of business has only one principal owner who is responsible for any debts that the business may incur, and this owner pays taxes on the net income of the business.  Because this type of business is the easiest to start or terminate, we would recommend this type for you.

The second choice is partnership.  If you and a friend / relative are working together making crafts and want to set up the business as a “team”, then you’ll want to choose the partnership.  In this business relationship two or more individuals agree to co-own a business.  The basic problem with the partnership is that any of the partners could make a major decision without the approval or knowledge of the other partner or partners.  If this major decision happens to be a BAD decision, all of the partners will suffer.  If the major bad decision causes the business to fail with mountains of bills left behind, all of the partners are equally responsible, not just the one who made the wrong decision.  If you choose to go with a partnership, be sure to get an attorney to insure that the necessary paperwork is drawn up so each of the partners knows what their rights and responsibilities are.

The third type of business organization is the corporation.  A corporation is a business et up by law to act as a single person.  As with a partnership, you should go through a lawyer to get the corporation set up, naming a board of directors, officers, etc.  The advantage of a corporation is that each person involved is limited financially to the amount of money he has invested in case of a business failure.  The disadvantage is that the corporation requires much more paperwork and record keeping.  Tax returns have to be filed for the corporation as well as individual tax forms for the persons involved, which results in additional time and accounting expense.

We would advise you to keep your business organization and record keeping as simple as possible in order that you can spend as much time as possible doing what you really want to do — make money!!  If you feel like you need to look into changing the type of business you currently have, please see an attorney  to get all the information, types of forms that need to be filled out and submitted, etc.

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