Business Structures to Avoid

So you have decided to go into business for yourself.


Starting your own business is one of the best ways to take control of your financial destiny and build your own wealth. Whether you start out as an independent contractor or virtual assistant working from home, moonlighting on a part-time basis, doing the MLM or network marketing thing, buying into an existing business, 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.

“Starting your own business is one of the best ways to take  control of your financial destiny and build your own wealth.”

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.

The Sole Proprietorship and General Partnerships:

A sole proprietorship is when you operate a business without the benefit of any kind of  separate legal entity, such as a corporation, 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 more than one of you making decisions, commitments and operating the business.

Any time you regularly provide services for a fee, sells 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.

In addition, because there are no separate formalities it’s much less complicated to operate than any other business format. In many cases, getting started is as simple deciding you’re in business for yourself. Although in some places, you need to file a business 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.

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 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, 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.

For one thing forming a corporation or LLC is easier and more affordable than ever before. And the advantages offered are so superior that its almost a no brainer.

If you have already started out as a Sole Proprietor or General Partnership, I urge you to explore the alternate as soon as possible, like, when you make your FIRST sale.

Watch a free video series on the pros & cons of the different business formats and tips on determining which one might be best for you –check it out here

Until Next Time!

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