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Using These Business Structures Can Destroy Your Wealth

Jan 9, 2008
So you've decided to go into business for yourself.

Starting your own business is one of the best ways to build your own wealth.

Whether you start out as an independent contractor working from home, moonlighting on a part-time basis, doing the network marketing thing, buying into an existing business, getting a franchise or actually starting your own thing from scratch; with your own business, and the right business structure you can reduce your taxes, & protect your assets while gaining more control over your own future. The catch of course, is to do it right.

There are several different structures you can use to operate your business, but there are two you should just avoid altogether.

* Sole Proprietorship
* General Partnership

Why do I say that, well there's a laundry list. But first let me just explain a little about what they are.

WHAT IS A SOLE PROPRIETOR OR GENERAL PARTNERSHIP?

A sole proprietorship is when you operate a business without the benefit of any separate legal entity, such as a corporation, limited partnership or limited liability company.

There is no separation between you and the business, you are the business.

A general partnership is when you operate that same business with one or more other people. The main difference is that now there is one than one of you making decisions, commitments and operating the business.

Any time you regularly provide services for a fee, sell things at a flea market, operate as an independent contractor, join an MLM or affiliate program or engage in any business activity whose primary purpose is to make a profit, without purposely forming a separate legal entity for the business, you are a sole proprietor, if you do it with a friend you are a general partnership.

EASY TO CREATE AND MAINTAIN

Because there are no separate formalities it's much less complicated to operate these two structures, than any other business format. In many cases, getting started is as simple deciding you're in business for yourself.
Although in some places, if you plan to use a name other than your own, you'll need to file for a business or "DBA" certificate.

Even the tax return is easier, the IRS only requires that you file a separate Schedule C "Profit or Loss from a Business" with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business. With a general partnership, it is a little more complicated. You complete an informational return, and then each partner gets a schedule K to include with their personal tax return.

Because of how much cheaper and easier it is to get into business this way many people take this route starting up their business as either a sole proprietor or as a general partner with a friend or significant other.

CHEAP AND EASY IS NOT ALWAYS THE BEST WAY TO GO

But don't let all of this ease fool you because you have unlimited liability, both for yourself and your partner if you have one, you have to pay self-employment and social security taxes and have fewer tax advantages than any of the other business formats you can use, and these business types are the most likely to be audited, especially, if it is a home-based business. In fact sole proprietorship and general partnerships can end up being the most expensive way to go in the long run.

As the sole proprietor, or general partner of a business, you have unlimited liability, meaning that if your business can't pay all its liabilities, or your business is sued. The creditors can come after your personal assets to pay the company debts. Many part-time entrepreneurs may not know this, but it's an enormous financial risk. If they are sued or can't pay their bills, they are personally liable for the business's liabilities. Another thing people don't always understand is, if you're sued personally, or your partner is, your business assets can be used to pay off that debt, even if the lawsuit had nothing to do with the business.

Plus if all of that isn't enough, businesses operating under sole proprietor or general partnership status can be harder to continue or sell and to negotiate a fair price, once you're ready to move on, because, there is no separation between you and the business entity.

These are just some of the reasons I tell my clients to stay away from these two types of business entities. Besides there is simply no reason not to take advantage of one of the more useful business operating formats available to you.

FORMING A CORPORATION IS EASIER AND CHEAPER THAN YOU MIGHT THINK

For one thing forming a corporation or LLC is easier and more affordable than ever before. Plus with an S-Corp or LLC you can take the start-up and business expenses as deductions against your personal income at tax time while still taking advantage of superior tax breaks and asset protection.

There are many options to getting your corporation or LLC established. You can do it through an online provider or just do it yourself. These services works much like a discount stock broker, you pay a little less, but you also get a lot less in guidance and direction. This is because these companies in not attorneys and are not allowed to give you legal advice of any kind. So, you really need to know what structure is best for your business before using them. If you're not sure, spend the extra few bucks to get proper legal advice.

If you're not sure what entity is the best for your business and particular circumstances right now you can use an attorney that either does incorporations, LLCs, and Limited Partnerships in your state, or the state you want to have your business established.

The folks at this website can form your business entity in all 50 states at very reasonable prices and will even have an attorney consult with you and/or your accountant about the best entity for your business before setting up your company.

If you have already started out as a Sole Proprietor or General Partnership, I urge you to explore the alternatives as soon as possible, and before you get sued, like, when you make your FIRST sale.
About the Author
Ranju is assistant to Pam Hamilton is the home business coach. Her company, http://www.build-a-biz.com/optinpage.html helps entrepreneurs and small business owners create and grow their business to build wealth, minimize taxes and protect their assets.
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