There are three different ways you can set up your business: sole proprietorship, Limited Liability Corporation (or LLC) and S-Corporation.
Before determining which is the best option for you, let's look into what each of these means.
Sole Proprietorship This is easiest and most common way small home-based businesses start out.
As a sole proprietorship there is no real separation between you as a person and your business.
You can use your social security number for tax forms and you'll even pay taxes on your personal income tax return.
You will need to fill out a form for "Doing Business As" or a "Fictitious Name" to establish your business name legally.
The one downside to a Sole Proprietorship is that since there is no distinction between your business and yourself, if someone were to sue your business, they would be suing you, which means that all of your personal assets can be taken from you if you are sued.
So you are running a bit of a risk in this situation.
Limited Liability Corporation (LLC) Even if you're the sole owner and employee at your business, you can still select to organize your business as an LLC.
The chief benefit of becoming an LLC is that it separates your personal assets from your business assets.
So as mentioned before if your business were sued, your personal assets would not be affected.
The other benefit of an LLC is that income is passed through the business so that you're not taxed on both the business end and on your personal salary.
However, with an LLC you will need to acquire a registered agent and there are yearly fees you will need to pay.
There are different ways you can register as an LLC so it is best to consult an expert before determining what the best method would be for you in your area.
S-Corporation The S-Corporation category is the one I find most confusing.
To be categorized as an S-Corporation requires a lot of paperwork, and quite honestly is really only beneficial if you're making a significant amount of money, at least from what I've seen.
One of the big benefits of being a S-Corporation is that you are only taxed on the salary that you're paid by your business and you aren't responsible for self employment tax.
You also have the ability to sell your business as part of a retirement strategy, write off start-up losses, and gain protection against liabilities.
On the other hand, you are required to offer stock and acquire shareholders, which can be quite complicated and confusing.
S-Corporations are also required to have directors and officers, regular meetings and maintain minutes form their meetings.
So you can see how an S-Corporation requires quite a bit more work.
There are obviously pros and cons to any category you decide to file your business as and it really comes down to what you think will be best for you.
Many small business owners start out as a sole proprietorship and as their business grows work their way up to a LLC.
If you're not sure what the best option is for you, you can always consult a professional or visit your state's webpage for more guidance.
Just be sure that however you decide to file you're business is set up as a legal entity.