Partnership is similar to a sole proprietorship, except the business has 2 or more owners. These owners are responsible for all aspects of the business and receive all the profits from the business. Legally, the owners ARE the business. Income and expenses are reported via the regular individual income tax forms, such as the Federal 1040.

Partnerships can be set up in several ways:

• General Partnership: An agreement among the partners determines how to divide responsibility for management, liability, profits, and loss among the partners.
• Limited Partnership: Most of the partners have limited input and liability for operation of the business.
• Joint Venture: A partnership for a single project or for a limited time.

Advantages of a partnership include the following:

• It’s relatively easy and inexpensive to set up or dissolve
• The owners have total control over the business
• The owners receive all the income and determine what happens to it
• It may be easier to raise additional funds from outside sources than for a sole proprietorship

Disadvantages of a partnership include the following:

• The owners are jointly responsible for any debts or liabilities incurred by the business
• Each owner is legally responsible for the actions of the other partners
• Any benefits—such as medical insurance—may be only partially deductible from tax returns
• Disagreements about any aspect of the business may occur
• The partnership may dissolve if one partner leaves or dies

Corporation is considered a separate, legal entity and is usually chartered by the state in which it is based. The business is separate from those who own it. The corporation is responsible for all aspects of the business and receives all the profits from the business. The owners are shareholders, receiving dividends from any profits earned by the business. They elect a board of directors to oversee the business.

In most cases, corporations are set up as “C” or “regular” corporations. In some cases, a corporation is set up as a “Subchapter S” corporation. This allows shareholders some flexibility in how corporate earnings, profits, and wages are classified, potentially lowering the amount of payroll taxes. A Subchapter S corporation functions much like a partnership.

Advantages of a corporation include the following:

• Shareholders have limited legal liability for the actions and debts of the company
• Employee benefits are deductible from taxes
• It may be easier to raise additional funds from outside sources through the sale of stock
• The corporation does not dissolve when owners change

Disadvantages of a corporation include the following:

• A corporation is more difficult and expensive to start
• Corporations may be more closely monitored by a variety of local, state, and federal agencies
• Dividends paid to shareholders aren’t tax deductible to the corporation; overall taxes may be higher, as shareholders also must pay taxes on the dividends.

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Many professionals must obtain a state license before practicing in the State of California. Does your business require you to have a license to operate? Learn which professions require a license by visiting the website for the Department of Consumer Affairs.

A home office can be a great place to start a business, especially if you provide a service. However, check with your local city or county government to make sure there aren’t restrictions on operating a business from your home. It’s also worth a call to your insurance agent, as many times personal property and homeowner’s insurance will not cover any damage to your home-based business. Finally, discuss your plan with a tax advisor, as home office space is treated as commercial real estate and must be depreciated over a long period of time. If you sell your home, you may be liable for additional taxes from the undepreciated part of the home office.