Should You Incorporate
Your Home Jewelry Business?

© by Simon Maher; all rights reserved

What does it mean to incorporate your business?

When you run a business without incorporating (and by incorporating, that includes S-Corps, LLCs, or limited partnership), you are called a sole proprietor. From a tax standpoint, you and your business are one and the same. That can be good or bad depending on your precise circumstances.

What is definitely not a good thing about being a sole proprietor is that your personal and business assets are considered one and the same. That means that creditors of your business--suppliers, the bank, someone who slipped and fell at your store--can take any of your personal assets. Your home, car, furniture, even the clothes off your back are all fair game to your business creditors. With the major changes to the law in 2005, don't expect bankruptcy to save you either.

If you don't fear being sued, then the limited liability of being a corporation isn't necessary. There probably aren't many sources of liability when selling jewelry. Even if someone hurt themselves in your home, your homeowner's insurance should cover any expenses. Be sure to tell your insurance agent about your home based business so he/she can add an endorsement to your policy to cover business visitors. You premiums will increase slightly, but you will get protection.

The other reason not to incorporate is if your jewelry business is mainly a hobby. If you don't intend to make a serious income, by which I mean about $1,000/month, then it's probably not worth it to incorporate. Not only is there an initial filing fee to incorporate, some states charge annual fees as well. Moreover, you will have to file additional tax returns for your business.

If the above section hasn't scared you off, there are some good reasons to consider incorporating:

• The first is if you're worried about business debts threatening your personal assets. It's not just slip and fall lawsuits that can harm you. If you breach a contract to buy supplies or to provide finished jewelry, you could be liable not only for the broken contract, but for consequential damages as well.

• The second reason is taxes. There are tax advantages that you can get while incorporated as a limited liability company (called an LLC), that you can't do as a sole proprietor. The details are too complex and lengthy for this article, but be assured that people don't form LLCs because they enjoy filling out government forms and paying fees--there are real advantages.

I've already hinted at the answer. Without knowing your precise circumstances, I can still tell you that if you want to incorporate, the only entity to consider is an LLC. C corporations are expensive and complicated to maintain and their owners get hit with double taxation. S-corporations are also cumbersome and have restrictions on who can be an owner, how many owners, and so forth.

LLCs, on the other hand, are perfect for small businesses. They are simple to form. All you have to do is fill out a 1- to 2-page form (depending on your state) called Articles of Organization. They are easy to maintain--unlike C corporations where bylaws and minutes and director meetings must be held, LLCs can be run relatively informally.

LLCs are particularly good if you want to have a partner. A traditional partnership (in the legal sense of the term), is almost never a good idea. All you do by becoming a partnership is now expose each partner not only to liabilities created by their own actions, but are also responsible for anything bad the partner does.

By forming an LLC, you can limit your liability while also structuring your business to share profits and losses with your "partner".

Hopefully this gives you a few things to think about with regards to the next step in your business. While making and selling your jewelry is the fun part of the business, the legal, accounting and taxes are still there. Visit my site, LLC Made Easy, for more information on limited liability companies. There's no hard sell there, just facts to help you make a decision that works for you.

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