Corporation
When you incorporate, you give birth to a being capable of acting independently of its parents (shareholders) whose liability is generally limited to the corporation's assets. A corporation can sell shares of itself in order to raise capital and can be sold in its entirety to new owners. You can be either a C (regular) corporation, which retains its profits and losses except for what's distributed among shareholders as dividends. Or, as a small business, you can become a Subchapter S corporation, in which profits and losses flow directly to shareholders, with the corporation paying no taxes.
Many more considerations develop when tax laws are applied to your particular situation, so I'll stop here and suggest that you consult your accountant for a careful look at your plans. And if you find you don't have to incorporate, all the better. It brings with it a great deal of time consuming and potentially expensive overhead.
William Stolze, author of Start Up: An Entrepreneur's Guide to Launching and Managing a New Business (Hawthorne, NJ: Career Press, 1994), relates his own experience, "I once had a small software business that I formed as a hobby and made the mistake of incorporating too soon. It cost me about $500 to form the corporation, about $1000 a year in franchise tax and legal and accounting fees, and, finally, about $1000 to terminate the corporation." Don't get into it unless the reasons are clear and convincing.
Limited Liability Company
Here's a new twist that offers the flexibility of a partnership in income and profit distribution, plus the protection against liability of a corporation. State laws governing LLCs vary. Check them out.
Insurance
Most of the liability concerns of a sole proprietor or partner can be taken care of with a good insurance policy. Types of policies vary greatly depending on the kind of business you're in, so ask a trusted insurance agent. In addition to protecting your personal assets against business related claims, you'll want to consider insurance on business equipment, inventory and documents, as well as liability for injuries occurring on your company's premises, or other liabilities your work may create.
Health insurance will apparently continue to be a key hurdle in self employment for the foreseeable future. For many small businesses (mine included), it's the single largest monthly bill to pay. While as an employee you probably enjoyed coverage that included all or almost all doctor and hospital fees, as an in dependent seeking to cover yourself and your family as you launch a new enterprise, your approach will shift. Because of the high cost of full coverage, you'll likely wind up opting for coverage that offers a lower basic premium but has a high deductible, which means you pay for all kinds of routine care as it occurs and are covered only for major illnesses or injuries.
If an equitable system of portable health coverage were ever adopted in the United States, it would be a huge boon to entrepreneurism. Stay tuned to your options and, if you're covered now under COBRA (the option to continue, for up to 18 months at your own expense, coverage provided by your previous employer), you should be planning to get out of it and into a new program while you're healthy. Don't wait until your COBRA eligibility expires. You'll also want to look at disability and/or term life insurance coverage now that your business depends so heavily on your personal ability to be there.
Home Work and Your Work
I raised the idea of working at home in Chapter 3 because I feel it makes so much sense, it may be worth shaping your business around, rather than shaping your life around your work in another locale. Even someone thinking of opening a retail store can consider other ways to serve customers that could make working at home viable. But clearly, working at home isn't for everyone or all businesses.
Your home may simply not be suitable, for example, for reasons of location, available space, family considerations or whatever. Above all, don't locate at home only because it's less expensive. If all other signs point to leasing business quarters, go for it. There's almost nothing more important to the success of your business than your personal comfort at work, since you're going to be spending a huge amount of time there! And if location away from home is key to reaching your customers, seek the best location available and make its cost an immovable, cornerstone item in your business plan.
If your home has room for corporate headquarters and is compatible with your business in at least a few other ways, you're golden. You don't have to go to work every Monday morning just to cover the rent. You've just moved hundreds or thousands of dollars every month straight to the bottom line.
Let's conduct a compatibility check. What are the key practical considerations of basing your business at home? In doing so, let's imagine we're setting up an office that's the home office of a very small company just you, or no more than another part time employee or two or, it could be your home satellite office for a larger enterprise based elsewhere. (Remember my advice in Chapter 3: You've really got to have some kind of office at home anyway, because being self directed isn't something that's turned on and off at 9 and 5 everyday. So it's all just a matter of degree: How wonderful will your office at home be?)
