Do Home Businesses Need to Use a Business Entity?

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There are lots of people who work from home, and many of them could use a business lawyer for home businesses. In 1995, audiences thought it was outrageous when Homer Simpson worked from home, wearing a comfy muumuu, but it was one of many times in the 90s when The Simpsons was way ahead of its time.

Which Business Entity Type Should You Choose for a Home-Based Business?

Many home-based businesses are one-person operations. If you are working from home and do not have any employees besides yourself, then you might consider doing business as a sole proprietorship.

A sole proprietorship is not a business entity, it is just an individual doing business under a fictitious
business name, sometimes called a DBA (Doing Business As) that requires a filing with the county recorder in the county in which the individual is doing business.

A sole proprietorship is the simplest and cheapest way to operate a business. It is also the riskiest because there is no entity shield to protect your personal assets from your business liabilities and debts. A sole proprietorship should only be considered for the simplest, smallest business operation. The minute your business becomes a real profit-making business or the minute you hire any employees or contractors, you should be operating your business with an asset protection entity, such as a corporation or a limited liability company. Only by using an asset protection entity can you protect your personal assets, such as your home and personal property from your business liabilities and creditors. When you operate your home business as a sole proprietorship, you report your business income on your individual tax return. Thus, there is no need to file a separate tax return.

Some Cases in Which Sole Proprietorship Might be Used

Not all home-based businesses are alike, but many of them could initially operate as a sole proprietorship. But before you just go ahead and use the sole proprietorship form for your home-based business, you should chat with a good business lawyer to make sure that form will work best for your specific business. In many cases, you could be saving a lot of money by using a business entity instead of operating as a sole proprietor, even after subtracting the costs of forming and operating as an asset protection entity.

The following situations involve home businesses which might work initially as a sole proprietorship.

-Individuals who are just exploring the formation of a home-based business and who do not have the budget to properly form an asset protection entity for their business. But as soon as their home-based business start-up becomes a real business, and they have the budget to form an asset protection entity in which to operate their business, they should be talking to a good business lawyer to find out what is the best entity option and structure for their asset protection business entity.

-Self-employed individuals who get paid as independent contractors for their work for one or more companies (this category includes freelancers). However, many if not most companies today require their independent contractors to operate as a business entity such as a corporation or a limited liability company for the protection of the employing company.

If you operate your home business under an asset protection business entity, you will probably end up saving money because of the increased opportunities to deduct business expenses. And if operated properly, you will also get protection for all of your personal assets from business obligations and expenses. In addition, using a business entity to do business can significantly improve your personal balance sheet and income statement because you will be able to move all of your business debt and expenses out of your personal balance sheet.

Even if you think that a sole proprietorship is the way you want to start your home business, you should first spend a little bit of money to discuss it with a good business lawyer to make sure it is the right thing to do for your situation.

James H. (Jim) Gulseth was born and attended high school in Devils Lake, North Dakota and graduated with an A.B. degree from the University of California at Berkeley. He earned his JD degree at the University of California Hastings School of Law in San Francisco. He is a member of the Corporations, Business Transactions, Securities and Tax and Intellectual Property Sections of the State Bar of California and is a member of the State Bar of California, the Alameda County Bar Association, and a member and past President of the Eastern Alameda County Bar Association.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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