After finishing your courses or working for another inspection company for years now, you might be planning to start your own inspection business. Starting your own business can be exciting but intimidating at the same time. You should first ask yourself the best business structure for your home inspection company.
When deciding on a business structure, you have to consider factors like how much liability protection it offers, taxed, and if it fits your goals.
Let’s check out the main types of business structures you can choose from, and we will help you decide which one will work best for you by answering some questions.
Sole Proprietorship
The simplest business structure is the sole proprietorship, and this is the best option if you’re starting up since it is easier to set up and dissolve. A sole proprietorship is also the least expensive compared to other business structures.
You and your business are the same when you are a sole proprietor. You are the business owner and have full control in decision-making. You will receive your total company income and file taxes using your tax return.
However, there are also disadvantages to sole proprietorships:
- You own your business which means you are responsible for all the liabilities sustained against the company. For example, you may lose your assets if you run into financial issues because of a lawsuit.
- Since you are a sole proprietor, you will have to pay more self-employment taxes and miss some tax benefits.
- You might have a hard time being viewed as a professional. A sole proprietorship may not be seen as credible as corporations or LLCs because more complex structures are more appealing to high-paying clients.
- It is more complicated to find investors. It might be more challenging to raise funds with a more straightforward business structure. You may want to go with another business structure if you plan to attract investors.
Partnership
This business structure applies if two people own or want to start a business together. Legally speaking, there are no differences between the company and the two owners. You have to agree on some terms and put them in writing. Here are the things you have to decide upon as business partners:
- Protocols in resolving disputes
- Division of the business’s profits
- Adding more employees
- Terms in dissolving the partnership
The business should be easier to set up once you have a partnership agreement.
You should now be able to decide on which Partnership Structure to choose:
- General partnership: The agreement dictates that all profit shares and responsibilities should be divided among partners.
- Joint venture: It is similar to a general partnership, but di only difference is it has an end date.
- Limited partnership: Decision-making power and liability depend on your initial investment in the business. It is a much formal business setup and not too familiar in industries.
It is much easier for you to raise funds compared to a sole proprietorship, and not to mention you’ll have someone to help you shoulder expenses and help you with the difficulties in starting a business.
However, it is not perfect and has its disadvantages:
- Partnership compatibility. You will never know if you will work well together until you’ve tried it. If you don’t agree on some terms or have different decision-making styles, it would become difficult to work with each other.
- Both are personally liable for each other’s actions. For example, if your partner faces a lawsuit, your assets are also at risk.
- Weak business lifespan. The business can be easily dissolved if one owner passes away or decides to leave the business.
- It has fewer tax benefits. You will miss some tax breaks, especially on the deduction of health insurance premiums.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) enjoys the benefit of a sole proprietorship, partnership, and corporation. The LLC is less complicated to manage than a corporation and provides more liability protection than a sole proprietorship.
The owners are considered “members” of an LLC. Declaring yourself as a “Single-member” is allowed in some states. You need to file an operating agreement with your state for the company’s duration, membership, and organization.
There are still some disadvantages to LLCs:
- Creating an LLC is cheaper than a corporation but still more expensive than the rest of the business structures.
- You cannot cash out checks made out to your LLC. You should deposit them first to your business account.
- Make sure to keep your personal records and finances separate from the business ones.
Corporation
A corporation is like a separate individual from its owners and other members. Once you start a corporation, it will already take on a life of its own and be held responsible for contracts, taxes, and lawsuits. The existence of a corporation will no longer depend on its owners or founders.
The owners are also known as the shareholders. The shareholders are responsible for choosing the board of directors to handle the policies and decisions made for the business.
The board of directors is now responsible for electing executives to take care of the day-to-day obligations.
Why choose “corporation” to be your home inspection business structure?
The corporation will give you the most liability protection among other business structures. You are only responsible for your own “stocks,” which means if all else fails, only the corporation’s assets are at risk and not yours.
The quickest way to get more investors and expand is by choosing to have a corporation. You can sell your shares in the business when you decide to leave or retire.
Here are also the downsides of choosing a corporation:
- A corporation is the most expensive and complex among all the other structures.
- You need to comply with all the laws and regulations by working with financial professionals and lawyers. Making a corporation function properly requires more of your time and money.
- You will encounter a lot of government supervision. Regulations are in place since most of the corporations are being mismanaged. A lot of paperwork needs to be done in compliance with this oversight. You must be prepared to be monitored by government agencies.
- The taxes of a corporation is separate from the shareholders. The income may be taxed twice because the shareholder’s income is considered a dividend. You will end up paying higher taxes compared to other business structures.
The taxes of a corporation is separate from the shareholders. The income may be taxed twice because the shareholder’s income is considered a dividend. You will end up paying higher taxes compared to other business structures.
S-corp
You might get recommendations to set up your company as a subchapter S corporation or an S-Corp. S-corp is a tax election within Subchapter S of Chapter 1 of the Internal Revenue Code. If you have a corporation or an LLC, you can classify your company as an S-Corp.
You can avoid double taxation or paying employee and corporate tax on the same income.
An S-corp can pass corporate deductions, income, losses, and credit through the shareholders’ income tax returns.
Here are the requirements your company should have, according to IRS:
- 100 shareholders or less
- At least one class of stock
- A reasonable compensation
How can you choose which structure is best for you?
After learning the difference between the business structures, let’s now check out these factors to consider in choosing the proper business structure for you:
- The number of employees you need for your business
You have to consider how many people you need to run your business smoothly. Is there a need for investors and quick expansion? You may want to go with the corporation structure if you want your business to grow and generate funding through investors as soon as possible.
- Savings on taxes
For sole-proprietorship structure, tax costs approximately 15% of their business’s profits than their regular income tax. If you think you can and there’s a need to save more on taxes, you might want to set up an LLC or a corporation.
- The scale of structure you can manage.
Suppose you are too busy and will not give time to complicated business matters. In that case, you might want to choose the simple sole proprietorship.
- Personal liability protection
If a home inspector receives a claim or a lawsuit, liability is always at risk. Remember that choosing a corporation or LLC will give you the most personal liability protection. While being in a sole proprietor structure gives you the least liability protection and significantly affects your savings.
Starting your own home inspection company is a big step in your life. You need to be very careful in choosing the proper business structure since a lot is at stake. Besides doing research, you might want to consider seeking advice from experienced and trustworthy professionals. In the end, you should assess which structure can help your business reach its goals and be successful in the long run.