If you are starting your own home business, you should learn about the advantages and disadvantages you'll face if you decide to incorporate your business. Your home business does not need to be a large company, or even hire other employees to benefit from incorporating.
Incorporating your home business may provide tax advantages for you, and it will put your personal property at less risk than a sole proprietorship. Setting up your business as either an S Corporation or a Limited Liability Company (LLC) can provide several advantages.
Advantage 1: Limited Financial Protection of Your Personal Property and Assets
When you incorporate your business, you will be setting it up as a separate entity from your personal life and assets. This means you will be able to conduct your business without worrying that you could lose your home or other personal assets due to a business liability.
Advantage 2: Tax Advantages
Because a corporation or limited liability company will be taxed as a corporation, you can avoid double taxation of corporate profits. Also, you will be able to deduct normal business expenses including office equipment, office space, vehicle expenses, phone and internet service for your business, office supplies, and other expenses that are used solely to run your home business.
Advantage 3: A Company will Outlast Personnel Changes
If you leave or sell your corporation or LLC, it can continue to exist under other management.
If you are the owner of a Limited Liability Company, you will report your share of business profits and losses on your personal tax return. If you are the owner of an S Corporation, you will report your business profits and losses on an additional tax return for your S Corporation.
Another difference is that LLCs are slightly easier to set up and manage than S Corporations. You will not need to hold annual meetings, and you will not be required to be a U.S. citizen.
An advantage of starting an S Corporation is that you can sell stock in your company to investors.
Main Disadvantage of Sole Proprietorships
While setting up your home business as a sole proprietorship may seem easier than incorporating, it is not recommended. If you decide to set your home business up as a sole proprietorship, there will not be any distinction between your business assets and your personal assets. All business expenses will have to be paid with your personal resources. You will be personally liable for any business debts. This risk is too big for most people to want to assume.
It is best to get advice about setting up your business from a Certified Public Accountant. She will be able to help you set up your business properly for liability protection and tax advantages.