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 establish corporate credit separate from your personal credit with a sole proprietorship. In order to build company 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 business 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 our members 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 this credit information 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 business 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 companycredit 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 establish corporate credit and you want to protect yourself from personal liabilities.
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Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insiders Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.
Marco Carbajo says
Your welcome! Thankyou for the feedback 🙂
Marco Carbajo says
Be careful when deciding to use executive suites. Companies like HQ, Regis and DaVinci assign the same suite number to every business owner. One of the main problems with this is the business credit bureaus match your business credit file using your business address. So if your business address matches all the others in the same building you can easily contaminate your file from other businesses operating from the same address.
Sometimes lenders will even do a site visit before approving a loan. Imagine if you use a P.O. Box or a virtual office and the site inspector pays you a visit.
Don’t worry if you use a home address because some lenders are satisfied with a home office, even when they do a site visit. But make sure you have a designated office area in your home for your business. The kitchen table will not do!
Hope that helps you!
Marco Carbajo says
Great question Thaddeus! The Internet Tax is something that we all should be concerned as well as Nexus. My good friend Diane Kennedy wrote a post on this titled Is There a Nexus Questionnaire Coming Your Way? You should check it out as it may be helpful to you.
All the best,
Marco Carbajo says
You should check out allbusiness.com which is a site that I write for. It has great business information.
All the best!