One of my friends recently asked me whether or not he can build corporate credit for his home based business. After asking a few simple questions there was really only one obstacle that was preventing him from starting which was the legal structure of the sole proprietorship that he chose for his company.
Unfortunately, this happens to be the most common choice among home based businesses. Normally you don’t pay anything to start a sole proprietorship. Of course you don’t get anything, either.
Unless you count the following as valuable business assets:
- Lots of personal liability
- No protection from your business creditors
- An increased risk of being audited
- Problems with valuation for a subsequent sale of the business
The reason for this lack of protection is because a sole proprietorship is not considered a separate legal structure. Instead, it is considered a personal extension of you and because this business types is considered a personal extension of you, you don’t have any protection from it.
In addition, you can’t build a business credit file separate from your personal credit file with a sole proprietorship. In order to build corporate credit you will need to first incorporate your home based business and next obtain an employee identification number (EIN).
This step by far is the most important because it’s the foundation for what you will build your corporate credit upon. Not to mention all the other important areas that entity selection affects such as taxes, liability and asset protection.
Once you incorporate your business and have obtained an employee identification number you will then need to complete the standard corporate conformity guidelines that creditors expect your business to complete. There are over twenty specific tasks that I review with my clients prior to setting up their business credit file and applying for vendor credit lines to build their corporate credit.
Now if you’re wondering why your home based business would need to build corporate credit first ask yourself the following questions:
Do I use my personal credit cards to pay for my home based business expenses?
Do I purchase goods and services from other businesses using my personal credit in order to operate and grow my home based business?
Do the credit card charges I incur for my home based business show up on my personal credit reports?
When you build corporate credit you have the unique opportunity to obtain business credit cards with no personal guarantee. Best of all when you use these cards for your home based business expenses they don’t affect your personal credit reports!
Some other benefits include:
- Business credit cards have much higher limits than personal credit cards.
- You can build corporate credit even if you have bad personal credit
- Reduce your tax burden and improve accounting
If you’ve been doing business up to now without a business structure, both the IRS and your state government defaults your business into a sole proprietorship.
And that means you’re exposed.
Now is the time to select the proper business structure for your home based business if you want to build corporate credit and you want to protect yourself from personal liabilities.
Marco is founder of the Business Credit Insider’s Circle available at Start Business Credit.com
You may contact Marco directly at: ceo@startbusinesscredit.com
Follow Marco on Twitter @MarcoCarbajo and read more of his insights on BusinessCreditBlogger.com
