work at home, women in business, resources for small business

Ownership-Making Your Home Business Legal

After operating your home base business for a period of time you have to decide how you’re going to make it legal.

Yes I meant that to be read exactly as I wrote it! Many people run a home business and never think to legalize it in terms of ownership. It is to your advantage to do so because the form of ownership you choose has important financial, tax and marketing propositions.

There are several forms of ownership:

  • sole proprietorship-you are the only owner
  • partnership-2 or more parties-there are 3 classifications: general partnership, limited partnership, limited liability partnership
  • corporation -a legal “person”, separate from the individuals who own the corporation-there are 3 classifications: S corporations, C corporations, LLC

Which one should you choose? Well as I explained in part 1 of this Making Your Business Legal Series, I’m not an accountant nor an attorney. You’ll have to talk that over with one of them but here is some simple information that will help you get a grip on the TONS of information out there.

Sole proprietorship


  • the easiest to set up & run
  • you don’t have to maintain a separate bank acct, just keep accurate records
  • you don’t have to pay employment or unemployment taxes for yourself
  • less paperwork and fewer regulations to comply with


  • you are 100% responsible for all business debts & actions
  • You could lose your personal assets if the biz gets sued or goes bankrupt
  • financing your business may be more difficult-banks don’t like to lend to sole prorietorships
  • your fringe benefits are limited-for instance the amount of tax-free money that you can put in your pension plan is limited



  • it lets you pool resources with others to build a larger, more profitable business
  • the partnership can be formed for a specific project and then dissolved
  • you many have lower costs & fewer legal regulations than you would running as a corporation
  • all profits (& losses) get passed along to the individual partners


  • partners don’t always get along
  • each partner is legally responsible for the actions of the others
  • you need to have an attorney draw up a legal agreement and this could be costly
  • like sole proprietorship, your fringe benefits are limited



  • your corporation is a legal personality and can enter into contracts, own property, lend or borrow money etc.
  • under some circumstances your tax rate may be lower
  • it’s easier to transfer ownership
  • you may be able to raise capital more easily
  • incorporation will protect your personal assets
  • HUGE fringe benefits like the deduction of education costs, vehicles, employee insurance


  • your cost of doing business usually increases because of added fees
  • lots of paperwork
  • the IRS could limit your salary as an employee of your own corporation
  • your personal finances MUST be kept separate
  • you are subject to double taxation-the profits of the corporation are taxed as well as your dividends  on the profits. But for a small home business you’re usually won’t have that problem.

In part 3 of this Making Your Home Business Legal series I’ll break down the categories of corporations to help you decide which is right for your home business

To Our Mutual Success, Lady T

  • DR
    October 25, 2010 at 8:51 am

    This is such a deep blog! What can I say, you’ve hit the nail right on the head! Youve got a great way of communicating with the reader. Keep it up!


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