Work From Home Business Legal Issues
Selecting Types of Entities
How do I determine what type of work from home business to become?
What does that even mean?
First – you need to do this because the IRS wants you too! It determines how they will tax you and what forms you need to fill out.
Now let’s talk about the typical options for a work from home business:
- Sole Proprietorship If it’s just you – this is a simple and effective way to go. You file Schedule C to report your income and expenses from your business. You will also file Form 8829 for your Home Office. These forms go along with your regular Form 1040 tax return! You get to keep all the profits, pay all the taxes, and assume all the risk!
- Partnership Obviously, 2 or more people joining together. This requires legal advice to properly set up. All partners are 100% liable for each other’s work.NOTE: Married couples are still considered partnerships though a competent tax professional can file 2 Schedule C’s for Sole Proprietorship (one for each spouse) instead of going through the steps of a partnership.
- C-Corporation This is what Wal-Mart and other big companies typically are. You can be publically traded. Obviously, you need to see an attorney. However – most work from home businesses do not care about that! There are many “fringe benefits” you can deduct with a C-Corporation however, if you want things like company retirement plans, health care plans, and have shares of stock and pay dividends. You are protected from losing personal assets for company actions.
- S-Corporation An S-Corporation limits the number of shares and partners (100 or less) and can’t be a public company. There are also United States residency requirements. You need to see an attorney to set this up. You are protected from losing personal assets for company actions. With that said – it is my second favorite to a Limited Liability Company. Good news is you can set the two up together! If you are willing to put up with the hassles (such as having to put yourself on payroll, pay yourself a salary, take taxes out, and all that good stuff – though you can get this done for pretty cheap)
The benefits of an s-corporation are plentiful including the ability to not pay social security (12.4%) and Medicare (2.9%) taxes on the amount of money above the salary. Yes, 15.3% of the money above your salary is saved in taxes.
- WARNING: Be very careful and do not listen to advice on lowballing your salary. The money you pay yourself must truly reflect the work, importance to the company, going rates in the industry, and the time you put in. A large majority of your money should be going to your salary.However, should you receive as “salary” money from a re-occurring commission? Let’s say I sell pens. You agreed to by 100 pens per month until the contract is cancelled.Should I receive earnings in my salary for this every single month? Perhaps some income for maintaining the account. Other than that, it is passive income meaning – not in your salary, and not taxed by Social Security and Medicare!If you don’t know what residual income is – see this article on Work From Home Residual Income.This option is really only for those with medium and large work from home businesses. You also MUST see a lawyer and a tax professional to set it up.
- Limited Liability Company (LLC) A Limited Liability Company (LLC) allows you to have the benefits of a Partnership, C-Corporation or S-Corporation with less hassle and more flexibility. It provides protection of personal assets against business debts. It also requires a lawyer and tax professional to properly setup. Overall its unique nature makes it an attractive choice.
Most of you will likely end up as a Sole Proprietorship and file a Schedule C with your regular tax return. That is okay – most businesses file this way. However, if you are looking to expand your tax options go ahead and explore one of these other business setups.
You’ll find this kind of information first on my blog Work From Home Insights and Tips.
Legal Issues
Every state is different when it comes to starting a business. Instead of recreating the wheel, I have listed links to resources for each state. The IRS compiled all the important websites together for each state so that you can conduct your research!
I will say that I find for most small work from home businesses without employees, especially when you are working as a representative of a much larger company – simply filing your taxes each year as I’ve described as a Sole Proprietorship may be enough.
Be sure to post any questions, comments, or thoughts below in the comments section!
Links to Individual State Resources and Blogs (Tax, Insights)
