Definitive Guide To Starting A Home-Based Design Business - Part 4 - RD208
Release Date: 03/23/2020
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What structure are you planning for your design business?
In this final instalment of The Definitive Guide To Starting A Home-Based Design Business, I'm covering your business structure.
If you haven’t heard the first three parts of this series, I suggest you go back and listen to them.
- Part 1 - Is Self Employment For You?
- Part 2 - Business Plan and Your Workspace
- Part 3 - Legalities and Marketing
Once you know what you’re going to do with starting your business. You need to decide what form or structure it will take.
Your business structure will determine how and when you pay taxes. It may affect how you deal with banks, especially if you are applying for a loan or line of credit to help you get started. Different insurance rates may apply depending on your business structure.
I’m not a business expert. I highly suggest you talk to your local business center, your accountant, your lawyer and seek their professional advice on the structure that is right for your design business. Plus, the information in this article is based on Canada and the USA. Rules and regulations may differ where in the world you are and may even vary depending on what state or province where you live. That’s why it’s important to seek the guidance of someone in your local area.
Also, your business structure can change over time. It’s possible that you start off using one model today, and switching to a different structure down the road.
The four business structures.
A sole proprietorship is the simplest way to structure your business. A sole proprietorship is a business that is owned and operated by one person, you.
- Easy and inexpensive to set up.
- Flexible - there are few regulations to comply with.
- The business is directly controlled by you, the owner/operator.
- Business losses can be deducted from other personal income.
- The owner is personally liable for all debts of the business.
- The life of the business is confined to that of the owner.
- All business income is taxed as personal income.
If you are running a sole proprietorship under a name other than your own name, you are required to register the name with your government business registry.
A partnership is an agreement between two or more parties where they combine their skills and resources and share ownership in the business.
- Reasonably easy and inexpensive to set up.
- It allows a group of people to pool their skills and resources without the expense of incorporating the business.
- Reasonably easy to add or remove partners from the business.
- More people means more sources of capital.
- Business risks are shared by all partners.
- Each partner is personally liable for all business debts.
- Each partner is responsible for the actions of the other partners, which affect the business.
- Profits are personally taxable.
- Slow decision-making and conflict resolutions because the approval of all partners is required.
A cooperative is an enterprise, or business, owned by a group of people or companies seeking to satisfy a common need. The initial capital for a business cooperative is raised by member shares, and personal liability is limited to the value of each member’s share. All members have one vote, regardless of the value of their shares.
- More sources of capital due to members’ contributions.
- A higher volume of production and service possible because there are more people involved.
- Members provide mutual support and pool skills.
- A relatively flexible structure allows for changes in membership and responsibilities.
- Members may have trouble making decisions together and resolving conflicts.
- Some banks don’t like lending to cooperatives, so individual members may have to arrange their own financing.
A corporation turns your company into its own legal entity. Meaning the company has the same rights as an individual. It can acquire assets; it can go into debt; it can enter into contracts, etc.
A corporation is the most expensive and most complex business structure to set up and operate. However, the majority of big businesses, as well as some smaller ones, are incorporated. In Canada, you have the choice of incorporating provincially or federally. In the USA, a business can be incorporated at the state or federal level.
For a home run design business, if you want to incorporate, you’re probably going to do it at the state or provincial level unless you regularly do business in a different state or province. For example, if you live in northern Florida and often travel to Georgia to meet clients in person, you may be better off incorporating on a federal level.
As an added benefit, if you incorporate on a federal level, you’re ensured that no other design business in your country can operate under the same business name. If you incorporate at the state or province level, there’s nothing stopping someone in another state or province from using the same business name as you.
- Owners are not personally liable for the debts, obligations or acts of the company.
- There are tax advantages to incorporating, talk to your accountant about them.
- Capital may be easier to raise, and loans may be easier to obtain for a corporation than the other business structures.
- The company exists independently of individual shareholders. I most cases, you the designer.
- Funds can be raised by selling shares of the business with little effect on you as the business manager.
- Corporations are the most expensive business structure to set up and do require a lawyer. Depending on where you live, the costs could be in the thousands of dollars to set one up.
- Additional paperwork, including recordkeeping, regular reporting to the government, and corporate tax returns that may result in more expensive accounting fees.
- Corporations are taxed differently than other businesses and implications vary depending on where you live.
- Despite limited liability, financial institutions may ask for personal guarantees on business loans.
Any time you see the words “Limited,” “Ltd.,” “Incorporated,” “Inc.” or “Corporation” you know that the business is a corporation.
It is possible to incorporate it on your own. Still, the paperwork and regulations can get very complicated, so it’s advisable to hire a lawyer to help you through the process, especially when it comes to the division of and types of shares involved.
Plus, you’ll need to set out bylaws for your own business, stating how your corporation will operate, how “officers and directors” are chosen, how the business accounts will be maintained, etc. In other words, incorporating can get complicated if you don’t have help.
The majority of home-based designers are individuals who want to run a business all by themselves. For them, a sole proprietorship is all they need. However, if you want the extra protection, and you don’t mind the extra work and expense, then incorporating is the way to go. And if you plan on working with someone else, you have the option of starting a partnership or a co-op.
Once again, let me stress that you should seek business advice from a professional before making this decision.
What business structure did you choose?
Let me know by leaving a comment for this episode.
Resource of the week 101 Ways to get freelance design work & clients looking for websites.