So you have decided to go into business for yourself.
Starting your own business is one of the best ways to take control of your financial destiny and build your wealth.
No matter how you start out. It can be as an independent contractor or virtual assistant working from home. Or you can moonlight on a part-time basis. You can buy an existing business or franchise. Even do the MLM or network marketing thing. Or actually starting your own thing from scratch. When you have your own business, and the right business structure you can reduce your taxes, & protect your assets. And, you can gain more control over your future in the process.
The catch of course, is to do it right.
There are several different structures you can use to operate your business, but there are two you should just avoid altogether.
Why do I say that, well there’s a laundry list. But first let me just explain a little about what they are.
The Sole Proprietorship and General Partnerships:
A sole proprietorship is when you operate a business without the benefit of any kind of separate legal entity, such as a corporation, partnership or limited liability company.
There is no separation between you and the business, you are the business.
A general partnership, is when you operate that same business with one or more other people. The main difference is that now there is more than one of you making decisions, commitments and operating the business.
Any time you regularly provide services for a fee. Sell things at a flea market. Operate as an independent contractor. Join an MLM or affiliate program. Or engage in any business activity whose primary purpose is to make a profit. And, you don’t purposely form a separate legal entity for the business, you are a sole proprietor. If you do it with a friend you are a general partnership.
In addition, because there are no separate formalities it’s much less complicated to operate than any other business format. In many cases, getting started is as simple deciding you’re in business. Although in some places, you need to file a business certificate.
Even the tax return is easier. The IRS only requires that you file a separate Schedule C “Profit or Loss from a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business. With a general partnership, it is a little more complicated. You complete an informational return, and then each partner gets a schedule K to include with their personal tax return.
Many people get into business this way because it’s so cheap and easy.
But Don’t Let All This Ease Fool You …
As a sole proprietor you have unlimited liability. As a general partner you and your partner(s) share unlimited liability. And that liability is for you and for each other. In addition, you have fewer tax advantages than other business formats you can use. And these business types are the most likely to be audited. That’s even more true if it is a home-based business. Because of this sole proprietorships and general partnerships can end up being the most expensive way to go in the long run.
As the sole proprietor, or general partner of a business, if your business can’t pay all its liabilities, or your business is sued. The creditors can come after your personal assets to pay the company debts. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. They are personally liable for the business’s liabilities. Another thing people don’t always understand is, if you’re sued personally, or your partner is, your business assets can be used to pay off that debt, even if the lawsuit had nothing to do with the business. And please understand, when I say business assets, I mean everything you own. Because, that’s what no separation means.
Businesses operating under sole proprietor or general partnership status can be harder to sell, or pass on to future generations. Or to negotiate a fair price, once you’re ready to move on. Often, because you are the business, there’s no real asset to offer. Your company’s goodwill, is totally tied to you.
These are just some of the reasons I tell my clients to stay away from these two types of business entities. Besides there is simply no reason not to take advantage of one of the more useful business entities available to you.
Forming a corporation or LLC is easier and more affordable than ever before. And the advantages offered are so superior that it’s almost a no brainer.
If you have already started out as a Sole Proprietor or General Partnership, I urge you to explore the alternate as soon as possible, like, when you make your FIRST sale.
Want to learn more? Checkout the Business Structure Workshop.