The words "entity" or "status" of your business may be used in two ways:  (1) to describe the legal entity of your business (sole proprietor, partnership, LLC, S-Corporation, C-Corporation) or, (2) to describe status of your business for tax purposes (pass-through or corporation).  In the following post we will be discussing which legal entity is appropriate for your business for asset protection purposes; here, we are evaluating what status you should be using for tax purposes. 

Generally, either a business is a pass-through tax entity or it is taxed as a corporation.  If a business is pass-through, the profits or losses are passed-through to the tax return of the owners.   The owner owes taxes for any profits, even if those profits are not actually taken home by the owner.

If the business is taxed as a corporation, the corporation files its own tax return and pays taxes on its profits.  Money may be paid to owners as salaries for work performed and the owner will pay taxes on his/her salary, just like any employee.  Other money may be paid to owners as dividends on their stock and the owner will pay taxes on dividends, just like any dividends received on stock.  More on Use the Appropriate Tax Status for Your Business Phase and Entity.

The question has two sides — is it legal to have a business in your home OR are you running your business legally?  The second questions deals with what you have to do to run your home business without getting in trouble with some government agency, but the first question asks if you are allowed to even have a home business in the first place. 

Answer:  It depends.  Don't you love lawyer answers?    More on Is it legal to have a business in your home?

I advocate using independent contractors, such as Virtual Assistants, as a way to grow your business without increasing overhead and regulatory issues.  But the only way for this strategy to work is for you to be actually hiring independent contractors, and not accidentally letting the relationship morph into an employee relationship.   If the person is actually an employee, you must be paying social security taxes, FICA, unemployment, and withholding income taxes on them — and you are personally liable for those payroll taxes if you are wrong (even if you are incorporated). 

How do you keep this from happening?  More on How do you keep your contractors from becoming employees?

Question from you:  "Do I have to get a tax ID number to run my business from home?

Answer:  It depends.  More on When do you need a Tax ID number for your business?