If you are starting a family business or a home business, you should choose the organizational form that you want your business to have. The basic organizational forms are a sole proprietorship, a partnership and a corporation. If you want just one person to own the business, then you should choose a sole proprietorship. If you want more than one person to own the business, you can choose a partnership or a corporation.

There are advantages and disadvantages to each organizational form:

• If you are a sole proprietor, you own the business and its assets, and you make all the decisions. However, you are personally responsible for the business' debts, and the business ends when you die.
• With a partnership, you and your partners share profits and losses, but you have to make business decisions with your partners.
• With a corporation, the corporation continues after the death of the original owners and the owners can limit their liabilities, but this organizational form is more complicated than the other forms.

You will need an attorney to set up a partnership or a corporation. You will benefit from speaking with an attorney before beginning any business.

You also have to decide where your business will be located. A home business can be an economical and efficient way to get your new business off the ground. But you'll want to check out these legal issues:

Zoning Restrictions

While your town or city may not have restrictions on home-based businesses, you should read your local ordinances to make sure. Some ordinances are worded so vaguely, it's difficult to interpret them. Other ordinances list specific types of businesses, such as professions or services that are allowed and exclude all other businesses. It's possible that your local ordinances will have a laundry list of appropriate occupations or businesses.

If you have doubts about whether your particular business is allowed after reading your local zoning ordinance carefully, you can contact local zoning department personnel for more information and give them non-identifying information as to the general area where you live and a generic description of the business.

You'll have the opportunity to appeal any planning or zoning board's rejection of a business in your home. It helps if you can show the approval and support of neighbors or others who might be affected by noise or extra traffic from your business.

Many condominiums and planned unit developments, such as closed or gated residential developments, have special rules called covenants or restrictions that restrict property use. It's important to read these covenants carefully, as neighborhood covenants are often strictly and vigilantly enforced.

Insurance Coverage

You'll want your homeowners' or renters' insurance to adequately cover your business equipment and property. Most homeowners' insurance policies require you to disclose to your insurance carrier the existence of a home business. It's best to be upfront with your insurance agent and pay whatever additional premium is necessary in order to be properly covered.

Licenses and Local Taxes

You'll probably need to get a business license from your city or town, and register your business in order to pay local or state business and occupational taxes. If you profit from your business and don't pay these taxes as you go, you could be subject to back penalties and taxes.

Federal Income Tax Considerations

You can potentially save money on your taxes by taking a deduction for business use of your home. You'll be able to deduct some of the costs of utilities, rent, depreciation, home insurance and repairs of your home if you meet these requirements:

• You must regularly use part of your home exclusively for a trade or business. "Regularly" means on a continuing basis, not just once in a while. "Exclusively" means that you use that portion of your home only for business purposes, not for other purposes such as entertaining or family use.
• You must use your home as your principal place of business. That means you must conduct all of your business from your home, or conduct the administrative or management activities of your business at home and have no other fixed location where you conduct those activities.

If you sell products and store your inventory at home, you can deduct expenses for the business use of your home as long as you don't have an office or business location away from home and store the products in a particular area of your home. You can use the space for other purposes as long as you regularly store products there.

Even if your home isn't your principal place of business, you may still deduct expenses for the business use of your home or a separate building if you consistently use part of your home just for meeting with customers.

Questions for Your Attorney

• What kind of organizational form can my family business have?
• How do I find out if my home business will comply with my town's zoning ordinances?
• Can I take a federal deduction for the business use of my home if I conduct my business there part of the time?

Sherrie Bennett is the former director and staff attorney at the University of Washington Student Legal Services in Seattle.

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- IRS Publication on Business Use of Your Home