Are you ready to start your own home inspection business? Whether you’ve been working for another home inspection company for a while, or you’re just getting started in the industry and want to go it alone, starting your own business can be an exciting — and intimidating — step.
In fact, the first question you’re faced with might stump you: which business structure is best for your home inspection company?
There are plenty of factors to consider when deciding on a business structure, including:
- How it’s taxed
- How much liability protection it offers
- Whether it fits your company goals
In this post, we’ll take a look at the main types of business structures you can choose from, and then we’ll give you a few questions to ask yourself when deciding which is the right choice for you.
If you’re just starting out, you may choose to start with a sole proprietorship. It’s the simplest business structure out of the bunch, and it’s the easiest to both set up and dissolve. A sole proprietorship is also the last expensive to put in place.
When you are a sole proprietor, you and your business are one and the same. You’re the owner and operator of your business, and you’re in complete control of your business decisions. All income generated by your company goes to you, and you file taxes using your personal tax return.
However, sole proprietorships have a few downsides:
- Since you and your business are inseparably linked, you’re personally responsible for all debts and liabilities incurred against your company. If you’re hit with a lawsuit or run into financial difficulty, you may risk losing your personal assets.
- You may miss out on some tax benefits. You’re likely to pay more in self-employment taxes as a sole proprietor. Other business structures also allow you to deduct expenses like medical insurance premiums from your income.
- You might have trouble being seen as a professional. As a one-person job, your sole proprietorship may lack that spark of credibility that corporations or LLCs have. If you want to expand your business or appeal to high-paying clients, you may want the extra “oomph” that a more complex business structure can provide.
- Finding investors is more difficult. With a simpler business structure, you may find it tricky to raise funds at the same scale as other businesses. If you’re looking to grow quickly, you may want to start out the gate with another business structure that will make it easier to attract investors.
If you have a business partner or two, the simplest choice is a partnership, which is the multi-person equivalent of a sole proprietorship. Legally, there is no difference between your company and its owners. You and your partner(s) simply write up an agreement of the terms of your partnership, including:
- How you’ll make decisions and resolve disputes
- How to add more employees and/or partners
- How you’ll divide the business’s profits
- How to buy out partners or dissolve the partnership
Once you have your partnership agreement, the business is extremely easy to set up. Like a sole proprietorship, you’ll claim your portion of the business income (as dictated by the partnership agreement) on your personal tax returns. You can decide between a few different partnership structures:
- General partnership: all responsibilities and profit shares are divided among partners as the agreement dictates.
- Joint venture: the business is similar to a general partnership, but it’s in place only for a certain clearly-defined time period (like for the length of a project). A joint venture has an end date in sight.
- Limited partnership: you and your partner(s) limit your liability and decision-making power based on the percentage of initial investment you make in the business. This is a more formal business setup than a general partnership and isn’t too common in service or retail businesses.
Unlike a sole proprietorship, however, you’ll have a bit more clout as a team than as a single person. It’s slightly easier to raise funds or attract more employees with more than one business owner, for instance. Not to mention that it can be easier to have another person or two to shoulder the burden of starting a business.
It’s not all sunshine, though. Let’s take a look at the disadvantages of partnerships:
- You’ll need to be compatible as a team. It’s sometimes difficult to gauge how you’ll work together until you try it. If your partner(s) decision-making or work styles don’t mesh with yours, you’re in for a rough time.
- As a partner, you’re jointly and individually liable for all the partners’ actions. So if your business partner breaks the law or gets hit with a lawsuit, your personal assets are at risk.
- The lifespan of the business is tenuous. Since it’s based on your individual partnership, the business may dissolve if a partner leaves or passes away.
- A partnership boasts fewer tax benefits than other business structures. Like a sole proprietorship, you’ll miss out on tax breaks like being able to deduct health insurance premiums from your business income.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) falls between a sole proprietorship/partnership and a corporation, and it enjoys the benefits of both. An LLC is designed to give more liability protection than a sole proprietorship while being less complex to navigate than a corporation.
In an LLC, the owners are “members” — and if you’re a one-person job, you can form a “single-member” LLC in most states. You’ll file an operating agreement with your state that determines the organization, membership, and duration of the company.
There are a few disadvantages to LLCs, including:
- Setting up an LLC is more expensive than a partnership or sole proprietorship (but still less expensive than a corporation)
- Checks made out to your LLC can’t be cashed. You’ll need to deposit them into your business account.
- You’ll need to keep business finances and records separate from personal ones.
A corporation is a separate business entity from its owners. In the eyes of the law, a corporation is like its own person; corporations can be sued, taxed, and held responsible for contracts. Corporations are chartered in a specific location and, once started, take on a life of their own. Their existence no longer depends on the personal ownership or involvement of the founders.
Owners are called shareholders. Shareholders choose a board of directors to handle decisions and policies for the business, and the board of directors elect executives to manage the business’s day-to-day functions.
That all sounds pretty complicated; so why set up your home inspection business as a corporation?
For one, this business structure gives you the most protection from liability. If someone brings a lawsuit against your business or your business falls deep into debt, it’s the corporation’s assets that are at risk, not yours. You’re only responsible for the investment you made in the company (or the “stock” you hold).
If you’re looking to expand your business aggressively, a corporation structure can help you raise funds quickly through the sale of stock on your business. You’ll also be able to sell your business if and when you’re ready to move on or retire, since you’ll simply need to sell your shares in the business when the time comes.
But choosing a corporation does come with a few downsides, such as:
- A corporation is the most complex and costly business structure to set up. You’ll need to invest a lot more time and money into the process, not to mention working with law and financial professionals to ensure compliance with all laws and regulations.
- You’ll be subject to a lot of government oversight. Since major corporations have a bad reputation for mismanagement, there are quite a few regulations over corporations of all sizes. You’ll need to be prepared to be monitored by local, state, and federal agencies — and that oversight comes with no small amount of compliance paperwork.
- Corporations are taxed separately from shareholders. Depending on your situation, you may end up paying higher taxes after all is said and done. Your personal income as a shareholder is considered a dividend, which isn’t deductible from your corporation’s business expenses. This means that income may be taxed twice.
What’s an S-Corp?
You may hear advice to set up your company as a subchapter S corporation, or an S-Corp. This classification is not a business structure, but a tax election within Subchapter S of Chapter 1 of the Internal Revenue Code. You can classify as an S-Corp if you have a corporation or an LLC.
With S corporation status, you avoid double taxation (paying both a corporate and employee tax on the same earnings). An S corp can pass corporate income, losses, credit, and deductions through the shareholders’ personal income tax returns.
In order to qualify for S-corp status, the IRS requires that your company have:
- 100 shareholders or fewer
- One class of stock
- Wages that are “reasonable compensation” (the amount you would reasonably pay an employee to do that work)
Deciding which structure is right for you
Choosing a structure for your new home inspection business can be difficult. It all comes down to your business goals, your management style, and the kinds of risks you’re personally comfortable with.
Let’s take a look at a few questions to ask yourself when deciding between the business structures above.
1. How much structure are you willing to navigate?
For some inspectors, a lot of administrative red tape can be headache-inducing. In that case, you may prefer something simple like a sole proprietorship.
Others would prefer a well-defined structure if it protects them and keeps healthy boundaries in place. For instance, it may be easier for you to keep business accounts and expenses separate from your personal ones if you have a completely separate business entity like an LLC or a corporation.
2. How much can you save in taxes?
Sole proprietors must pay a self-employment tax of approximately 15% of their business’s profits on top of their regular income tax. On the other hand, LLCs and corporations can file as an S-Corp and save potentially thousands on their taxes each year.
3. How many people will your business employ?
Are you planning to grow your business or remain a one-person operation? You may want to change your business structure as your company grows, or just start out with a corporation if you expect to need investors and funding within a short period of time.
4. How much personal liability are you comfortable with?
As a home inspector, you may be faced with a claim or lawsuit at some point in your career. While you should always carry Errors & Omissions Insurance regardless of your business structure, having a limited liability structure can also protect your personal assets.
As a sole proprietor, any lawsuit brought against your business can affect your personal savings and belongings. A corporation or LLC can keep you from being held individually liable for lawsuits brought against your company.
Choose the business structure that will start your company on the right foot
Deciding to start your own company is a momentous step in your home inspection career. But that decision can be a complicated one, since choosing a structure for your business is fraught with concerns like personal liability, government regulations, and taxation.
In the end, it’s essential to do your research, seek the advice of a dedicated and trustworthy tax professional, determine your personal and business goals, and choose the business structure that will put your new company on its best path for success.