Are you ready to start your own home inspection business? The process can be both exciting and intimidating, but with the right tools and experience under your belt, you can build a successful and rewarding business. One of the first decisions you’ll need to make is what business structure to use. You have a few options, and it’s important to consider several factors before you make your decision, including taxes, liability protection, and your company’s goals. To help you choose the best business structure for your personal situation, let’s explore some popular options.
Choosing the Best Business Structure for a Home Inspection Company
First of all, we know you’re busy. Creating a new home inspection business from scratch is hard work, so you may want to save time and minimize stress by working with a professional on the legal aspects of setting up your business. Consulting with an accountant, an attorney, or even a business counselor may prove helpful, especially if you can find someone who specializes in small businesses. It may also save you money in the long run.
But whether you choose to work with a professional or not, it’s worthwhile to review some common business entities. Today, we’re going to look at sole proprietorships, partnerships, corporations, and limited liability companies (LLCs).
In a sole proprietorship, someone owns an unincorporated business by themselves, and they have full control over the business. Sole proprietorships are appealing because they’re easy and inexpensive to set up. However, they’re less attractive when it comes to taxes, and they’re also risky because the owner carries full liability. This means the owner is responsible for all debts against the business, which puts their personal assets at risk.
In a partnership, two or more people own an unincorporated business together. A partnership is simple in structure and easy to set up, similar to a sole proprietorship, but the partners share ownership according to the terms dictated in the partnership agreement.
Liability in a partnership depends on the type of partnership used. In general partnerships, the partners have joint liability. In limited partnerships (LPs), some partners have limited liability, but at least one general partner has unlimited legal liability. (Typically, the partners with limited liability also have less control over the company.) Finally, in limited liability partnerships (LLPs), all partners have limited liability, and the partners won’t be held responsible for the actions of other partners.
A corporation is a business authorized to act as a single legal entity that is separate and distinct from its owners. Compared to other business structures, corporations take the most time and money to establish, and their operations are more complex. Unlike sole proprietorships, partnerships, and LLCs, corporations must pay income tax on their profits. And in some cases (if you choose a C corporation, or C-corp), they’re taxed twice: when the company makes a profit and when dividends are paid to shareholders. However, corporations provide the strongest protections when it comes to personal liability. The corporation is liable for all debts and liabilities incurred against the business.
Sometimes considered a hybrid of a partnership and a corporation, an LLC is a business structure in which members of the company cannot be held personally liable for the company’s debts or liabilities. It’s less complex than a corporation but gives you more liability protection than a sole proprietorship. Although LLCs avoid corporate taxes, their owners are taxed on personal income and must also pay self-employment taxes.
Where to Start
Clearly, many factors come into play when you’re deciding between different business entities. If you want to quickly sort through your options, start by asking yourself these questions:
- How much time and money are you willing to spend on set-up and operations? If you want to minimize cost and stress, you may wish to avoid setting up a corporation. They’re complex and more likely to cause headaches. Consider a simpler entity like an LLC, sole proprietorship, or partnership
- How much personal liability are you comfortable with? One of the primary reasons that many people avoid sole proprietorships and general partnerships is that these business structures don’t provide personal liability protection. Any lawsuit brought against your business could impact your personal savings and belongings. Plus, in a partnership, partners may be liable for the actions of the other partners. If you want to avoid these risks, choose an LLC or corporation for protection.
- Which tax scenario works best for you? Depending on the type of structure you choose, you may be paying personal tax only (sole proprietorship), personal tax plus self-employment tax (LLCs and most partnerships), or corporate tax (corporations). Plus, there are S-corps, which are taxed as pass-through entities, and it’s important to note that LLCs may choose to be taxed as S-corps if they like . . . Clearly, taxes are complicated! It’s best to speak with an attorney to better understand your options.
If you want to get your company started on the right foot, it’s essential that you choose the best business structure for your unique goals and concerns. Take a little time to review your options and consult with your attorney or accountant. In addition, keep in mind that it’s possible to convert your business to another entity in the future if necessary.
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