Home based small business liability question

[marne]

A family member has given me her lifes work-all natural (you can eat all the ingredients)face and body cream recieps. I would like to make and sell them from my home. I would like to expand to sell to local beauty shops. LIABILITY is a big issue. How do I start and cover my ass-ets? I'm in Arizona.
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marne

 

[mike]

A family member has given me her lifes work-all natural (you can eat all the ingredients)face and body cream recieps. I would like to make and sell them from my home. I would like to expand to sell to local beauty shops. LIABILITY is a big issue. How do I start and cover my ass-ets? I'm in Arizona.
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marne

You may want to create a corporation of some type. There are various kinds that would limit your liability and it depends also upon whether you will have partners. Will you? In many cases an s-corporation is a good vehicle since it allows you to easily add shareholders and if under 35 (I think) you don't pay double taxation. This means that for tax purposes, the income to the corporation is charged as if it went straight to you and the corporation isn't taxed first and then you are taxed for the distribution of the money to you in the form of salary or dividends or some other type.

Another choice is the LLC or limited liability company. It offers the following advantages over a partnership or C-corporation (larger than 35 or sometimes 75 shareholders, depending upon the state.)

(1) Limited Liability -- you are not personally liable for the debts of the company.
(2) Pass Through Taxation -- you are taxed as though income to the company went directly to you and the company is not taxed and then you are taxed upon receiving the money from the company.
(3) Flexible Management -- The company is generally free to establish any organizational structure agreed upon by its members.

Note that LLCs do have a limited life (usually 30 years.) There are also circumstances when you may want to create an S-corp and I think that in the instance of a single shareholder an s-corp may be easier and more beneficial for you.

If one of the following apply, people will frequently choose an LLC instead of an S-corp
1 - An owner of the company is a corporation or a non-resident alien
2 - The company may be owned by more than 35-75 persons (see state law on s-corp limits)
3 - The company plans to offer more than one share of stock
4 - The owners plan to increase their tax basis by using business debt
5 - The state might impose a tax on an s-corp on the business being done but not on an LLC.