As the world moves back to its normalcy before the pandemic, there has never been a better time to think about setting up a sustainable structure for your home business. Running a home based business is just as viable as running any other business. This means that there is a need for legitimacy. When you decide to run your business from home, you would feel there is no need to incorporate such a business because you see it as being small, since you’re just starting out or so. However, it is a standard practice to incorporate a business; no matter how small or where it is operated from. The major reason is quite obvious. When your business is incorporated, there is a great deal of advantage that comes with it, most especially, protection.
In this article, you’ll get to understand the need to set your home based business up as a corporate entity. Why is it important to run your home based business using a corporate entity? What are the options available to you? You’ll get answers to all your burning questions including the important factors to consider before setting up your corporate entity.
What is a Corporate Entity?
A ‘Corporate entity’ is a business structure established to perform specific functions like holding assets and running an enterprise. It could comprise an individual, partners, shareholders or directors. These various corporate entities are regarded as ‘legal’, enabling a business to enter contracts and agreements like property purchases, owning bank accounts, assume obligations, incur and pay debts/ loans, issue stocks, sue and be sued.
Let’s explore the different forms of corporate entities.
Types of Corporate Entities
There are three forms of corporate entities in Nigeria. These are the different identities with which you would want your business to stand legally. Your business could be registered as a;
- Sole Proprietorship
This form of legal identity is the easiest, the most affordable and low-risk legal structure there is. It requires less paperwork and is easier to incorporate. The sole proprietorship is the best business structure for a single owned home business. However, it does have its downsides as there is no separation between your personal and business assets. In the case of any liability, you would be held entirely responsible.
Nevertheless, like a home-run sole proprietorship, the chances of your business running into a huge liability are very slim.
A partnership comes in when you run a business with other individuals. In this case, the need to create a legal entity becomes more pressing. It involves an agreement between two or more owners of a business who agree to share profits and losses in the business. This means less liability to handle, however, partners are still individually liable for the financial obligations of the business.
If you have plans of scaling your business, or opening a storefront, and in a situation where you want your home business as a separate entity from yourself, you might want to consider the option of incorporating as a company. A company can be taxed and held legally accountable for its actions as a separate entity. You get to totally evade a personal liability from your business. The business makes its own profit and is taxed as a separate entity. Creating a company allows you to seek investors in the form of shareholders. Shareholders in turn get to earn profits through dividends and stock appreciation.
The Need to Establish a Corporate Entity for Your Home Business
Running a business from home affords you the luxury of being your boss from the comfort of your home. However, the issue of business funding is a big challenge a lot of home businesses face today. To access loans and capital investments, there is a need for your business to stand as a legal entity. Investors also feel more confident investing in a registered business than an unregistered one.
Another advantage to running your home business as a legal entity is the ability to encourage customer’s confidence. Without a physical storefront and a corporate structure, it could be harder to convince customers of the legitimacy of your products and services. Other advantages include;
- Avoiding Personal Liabilities and Risks: Running your home business as a separate entity affords you the confidence to make functional decisions without worrying about the personal risks involved.
- Succession: Incorporating your business allows for continuity in case of unforeseen circumstances like death.
- Corporate Financing: To take loans from financial institutions like banks and corporations, your business must stand as a legal entity.
- Legal Protection: A corporate entity earns you exclusive rights to your business name and brand.
Factors to Consider When Choosing a Corporate Entity
As a homerun business, there are several factors to consider before deciding to incorporate your business. There is a need to evaluate the goals you have set for your business in the long run. Here are the factors to consider when considering business registration;
- Tax Implications: It is paramount to look at the various opportunities to minimize taxation.
- Legal liability: Do you need to separate yourself from the business? In the case of an incurred liability, who should be held responsible?
- Cost of Incorporation: You have to also consider the cost of incorporating the different forms of corporate entities, as some are significantly more expensive than others.
- Financing: How do you plan on accessing financing options? This should guide your decision.
- Continuity: What would happen to your business in the event of your demise? Which legal entity affords your business continuity?
Whichever decision you make for your small business, it is important to always weigh the pros with the cons. Numerous benefits come with running your business as a corporate entity. However small you feel your home business is today, there should be room for flexibility and growth. From the legal advantages to the financial edge, you would agree that your home based business would benefit more from being incorporated.