Do San Diego Home-Based Businesses Need to Use a Corporate Entity?

Many people work from home and own home-based businesses. Back in 2013, Forbes Magazine stated that more than half of Americans work for small business and over 50% of those are home-based. See here. Since 2013, even more Americans are working from home and owning home-based businesses.

In general, the reasons to incorporate a home-based business are the same reasons to incorporate a business that operates outside the home. There are many good reasons to incorporate and only a couple of reasons not to. A good San Diego corporate lawyer can help you decide.

Forming Corporations/LLCs for Home-Based Businesses: Reasons to Incorporate

When you incorporate your home-based business, the process creates a legal entity that, under California law, is separate from you. If you begin running your business through the corporate entity, there are many advantages that we have discussed in other articles. Among those are:

• Protecting your personal and family assets from being seized by creditors to pay for business-related liabilities and/or judgments
• Ease of transferring the business (if you ever want to “cash out”)
• Public relations advantages and credibility with customers — your business is often taken more seriously if you are incorporated
• Credibility with vendors and suppliers – same as above
• Access to certain vendors and suppliers — some wholesale and warehousing businesses will only sell to a business that has a business/tax ID number
• Access to jobs and contracts — some companies require their home-based freelancers to be incorporated
• Avoiding use of personal identifiers such as your personal social security number in business transactions — your corporation or LLC will obtain its own tax ID number; important in this age of identity theft
• Tax and expensing advantages — for example, the notorious IRS home office deduction may be better taken on the business tax return than on your personal tax return; consult with a tax professional
• Obtaining lender financing is often easier
• Building a business credit rating distinct from your own personal credit rating — a dual advantage

Forming Corporations/LLCs for Home-Based Businesses: Reasons NOT to Incorporate

In truth, the only reason to NOT incorporate is cost, in particular, the California Franchise Tax. When you form a new corporation or LLC, from that point forward, your new legal entity is also a tax-paying entity and must pay taxes and file tax returns. The annual franchise tax in California is $800 minimum. Thus, deciding WHEN to incorporate is mostly a function of business revenue. If your home-based business is only generating $3,600 in annual profits, the cost to incorporate is probably not justified.

Even with this example, in truth, it is difficult to predict whether incorporating might increase your annual profits sufficiently to justify the cost. If incorporating gives you access to lower-cost suppliers that, for example, save you $800 a year in material costs, incorporating might “pay for itself.” Again, seek the advice and counsel of a trusted corporate lawyer.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help you form a corporation or an LLC, can assist in keeping your corporation/LLC in good standing and can advise on various options. Mr. Leonard can also help draft and assist in reviewing/executing business contracts, and assist with any business-related matter. Contact Mr. Leonard by emails or by calling (858) 483-9200.

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Forming A Corporation In San Diego

Some Basics of Officer and Director Liability

How Trusted Legal Counsel Can Help Your Business

Another Reason to Incorporate: Establishing a Business Credit Rating