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When starting a home-based business, you must choose the best form of organization and ownership
for you. The form of organization used depends on the type of business, how many owners or
investors are involved, and how tax and liability issues will be handled.
Sole Proprietorship
The sole proprietorship form usually is advantageous to a new business because of its ease of
organization. The business owner is responsible for all financing, management decisions, and
liabilities of the business.
The owner is in direct control (you are the boss.
There are low start-up (organizational costs.
!t"s the form with the least government regulation.
This form offers ease of formation and a simple structure.
There is no double taxation.
#usiness losses can offset personal income (for tax purposes.
The owner receives all profits.
The owner has total (unlimited personal liability.
The business has limited financial resources (capital.
There is a lac% of continuity if the owner is disabled or dies.
The owner may have limited managerial expertise.
All profit is taxed as personal income.
The business can expand only with after-tax dollars.
&ost home-based businesses use the sole proprietorship form. !t is simple, inexpensive, and re'uires
less complex record %eeping methods than the other forms of ownership.
A partnership provides the opportunity to pool the capital and management resources of two or more
individuals to conduct business. Two types of partnerships are the general and the limited.
A general partnership is fairly easy to establish. A written partnership agreement drawn up by an
attorney should be used to clarify business arrangements and to avoid misunderstandings. The
general partnership agreement should include the following( a list of the rights and responsibilities of
each partner and their heirs) the management and continuity arrangements for the business in the
event of the death or disability of one of the partners) the profit and loss distribution plan) and any
special conditions or arrangements that may affect any of the partners through operation of the
business. When signed by all partners, the agreement is an enforceable contract.
*imple organization
Additional personal resources (financial and managerial
The right to select partners
+ow start-up (organizational costs
+imited outside regulation
,o double taxation
-nlimited liability for partnership obligations
+ac% of continuity when one partner dies or is disabled
*haring of profits
All profits taxed as personal income
$ifficult to raise additional capital
.ard to find suitable partners
$ivided authority (limited decision ma%ing
A limited partnership permits investor involvement with liability limited to the amount of the investment
or the amount agreed to in the limited partnership agreement. The limited partnership must include at
least one general partner who has general liability for the debts of the limited partnership. The general
partner usually manages the business. The limited partner usually exercises no control over the
business of the partnership but is merely an investor.
The general partner maintains control of the business.
The limited partner can invest with a limit on personal liability.
!t is an easy way to secure capital.
The business is not taxed directly.
This structure is complex to organize.
The limited partner has no control over the business.
The general partner has unlimited personal liability for the obligations of the business.
There is a lac% of continuity in the event of the death or disability of the general partner.
A /0/ corporation is a separate legal entity from its owners, the shareholders. !t can enter into
contracts, can be liable for any obligations, and must pay taxes on income as well as dividends
distributed to shareholders. A corporation attracts capital investment funds by selling shares of stoc%
in the company to investors or by trading stoc%s for assets. 1enerally, stoc%holders are not liable for
claims in excess of the current value of their shares. 0orporate officers may be re'uired personally to
guarantee ban% notes or loans) they are then personally liable for the obligation. 2ther creditors
generally can lay claim only to the assets of the corporation.
+imited personal liability
*eparate legal entity
*pecialized management
Transferable ownership
3erpetual life
4asier to raise capital
0losely regulated
&ost expensive to organize
0omplex organization and management
4xtensive record %eeping necessary
$ouble taxation
2ne corporate form that home-basers may consider is the /*/ corporation (*ubchapter *
0orporation. The /*/ corporate structure should be considered for the following situations(
The owners expect operating losses.
+arge dividends are anticipated.
The owner"s individual tax rates are lower than the corporate tax rates.
There are 56 or fewer stoc%holders.
The corporation has only one class of stoc%s.
The /*/ corporate structure allows a tax burden shift to shareholders. The election is made formally
on 7orm 8669 filed with the !nternal :evenue *ervice. The election can be made at any time during
the previous year or up to &arch ;6 of the year of election. #y April ;6, the /*/ corporation also must
file an informational return allocating profits or losses to shareholders.
#efore deciding on a form of business ownership, consult an attorney and a certified public
accountant (03A. Their expertise can help you avoid ma%ing costly mista%es. The final decision
should be based on what is best for your individual situation and business needs.
Limited Liability Company LLC!
A limited liability company (++0 is a business entity created by statute. !t has some characteristics of
a partnership and some characteristics of a corporation. A ++0 has the tax advantages of a
partnership and the limited liability advantages of a corporation. 3roperly structured, it is taxed as a
partnership or an /*/ corporation. !f the ++0 is not properly structured, it is taxed as a /0/ corporation.
7orming a ++0 is more complex than forming a partnership, but it is less complex than forming and
operating a corporation. 7orming a ++0 is a formal process, contact the &ississippi *ecretary of *tate
at <=;>96?-;<99. ++0"s are a relatively new form of business in &ississippi. +egislation creating this
form of business was passed in ;??@. !t should be noted that the lac% of precedent adds some
uncertainty to adopting this form of business. 4xperts predict however, that the ++0 will 'uic%ly
become the form of choice for many small businesses.
Table 0omparing the $ifferent 7orms of #usiness
"ype o#
Sole Proprietorship Partnerships Corporations Limited Liability Company
%eneral Limited C Corp S Corp
&e#inition A business owned and
operated by one person
for profit.
Two or more people who
Aointly own or operate a
business for profit.
2ne or more partners
have limited liability and
no rights of
An organization
formed under state
or federal law. An
artificial entity
separate from its
An organization
structured li%e a
corporation but taxed
li%e a partnership.
A business entity created by
statute. The owners are
called members. !t is taxed
li%e a partnership or an s
corp. !t has limited liability
li%e corporations.
Ease o#
4asiest form of
business to set up. !f
necessary, ac'uire
licenses and permits,
register fictitious name,
and obtain taxpayer
4asy to set up and
operate. A written
partnership agreement is
highly recommended.
&ust ac'uire an
4mployer !$ number. !f
necessary, register
fictitious name.
7ile a 0ertificate of
+imited 3artnership with
the *ecretary of *tate.
,ame must show that
business is a limited
partnership. &ust have
written agreement, and
must %eep certain
7ile articles of
incorporation and
other re'uired
reports with the
*ecretary of *tate.
3repare bylaws and
follow corporate
&ust meet all criteria
to file as an *
corporation. &ust file
timely election with
the !:* (within 8;>8
months of first taxable
7ile articles of organization
with the *ecretary of *tate.
Adopt operating agreement,
and file necessary reports
with *ecretary of *tate. The
name must show it is limited
liability company.
Period o#
Terminates at will or on
the death of the owner.
Terminates by agreement, or by death or
withdrawal of partner, unless there is a partnership
agreement to the contrary.
0ontinues until formal dissolution. &ost
stable form of business. ,ot affected by
death or disaffiliation of shareholder.
&ay terminate by
agreement, or withdrawal of
a member, depending upon
operating agreement.
"a'es 3rofits are taxed once.
3rofit and loss are
reported on the owner"s
individual state and
federal income tax
3rofits are taxed once. 4ach partner reports his or
her share of the profit and loss on his or her
individual state and federal income tax returns.
3artnership files an information return.
3rofits are subAect to
double taxation,
once at the
corporate level, and
again at the
shareholder level.
3rofits are taxed once.
4ach shareholder
reports his or her
share of profit and
loss on individual
income tax returns. *
corp does not pay tax,
with some exceptions.
!f the ++0 is structured
properly, each member
reports his or her share of
the profit and loss on his or
her individual income tax
returns. !t is taxed li%e a
partnership or an * corp. !f
the ++0 is not structured
properly, it is taxed li%e a 0
Liability The owner"s personal
assets are at ris%.
4ach partner"s personal
assets are at ris%.
1eneral partners"
personal assets are at
ris%. A limited partner is
liable only to the extent
of his or her investment.
+imited to corporate assets, except(
;. 3ersonally guaranteed business debts)
8. 3ersonal negligence or fault) or
9. 0orporate form is found to be a sham.
*imilar to rules for
&issol$tion 4asiest form of
business to dissolve.
3ay debts, taxes, and
claims against
3ay debts, taxes, and
claims against business.
*ettle partnership
3ay debts, taxes, and
claims against business.
*ettle partnership
accounts. 7ile
cancellation of certificate
with the *ecretary of
2btain shareholder approval to dissolve.
7ile statement of intent to dissolve with the
*ecretary of *tate. 3ay debts, taxes, and
claims against business. $istribute
corporate assets to shareholders.
3ay debts, taxes, and claims
against business. $istribute
remaining assets to
members. 7ile articles of
dissolution with the
*ecretary of *tate.
1ain on distribution
of assets is subAect
to double taxation.
1ain on distribution of
assets is taxed once,
with some exceptions.
Prepared by Carol )* S(h+ab, -*&*, LL*M*, a Member o# the North Carolina State Bar and a Family Reso$r(e
Mana.ement Spe(ialist #or the North Carolina Cooperati/e E'tension Ser/i(e, North Carolina State Uni/ersity,
Ralei.h, North Carolina*