Do I Need an LLC for a Home-Based Business?

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Many people starting a small business from their home are a sole proprietorship, meaning there is only one owner and operator. It is an easy business structure where the business owner includes any business income or loss on their personal tax return. However, there is a huge disadvantage for small business owners, namely putting their personal assets at risk.

What Is an LLC?

A limited liability company (LLC) is a legal entity that separates you and your personal assets from your business activities. LLCs offer personal liability protection similar to a corporation but also the tax flexibility of a sole proprietorship.

Benefits of a Limited Liability Company (LLC)

LLC owners know that an LLC incorporation is a popular business entity due to its ease of formation, low maintenance requirements, and low cost. Here are three main advantages of an LLC:

Personal Liability Protection

An LLC protects your personal assets from the claims, debts, and liabilities of your business. If someone sues your business, they can only go after your business assets and not your home, car, or other personal property. As long as you don’t mix your personal finances with your business activities, an LLC is a shield protecting your personal assets.

Tax Flexibility and Savings

An LLC allows you to choose how you want to structure your taxes. Many solo entrepreneurs opt for pass-through taxation, reporting any business income or losses on their personal income tax returns. This way, they avoid paying taxes on corporate and individual levels, which is called double taxation.

Additionally, as an LLC, you separate your business finances from your personal finances. This makes it easier to identify tax deductions on business expenses when you are doing your income taxes.

If you run your LLC from your home, you may be eligible for a home office deduction. This allows you to deduct a portion of your home expenses (such as mortgage interest, utilities, and repairs) based on the square footage of your office space.

For business deductions for tax purposes, check IRS guidelines or consult with your tax professional.

Company Name Protection

If you are a sole proprietor, you run your business under your name, or you can file for a DBA (doing business as) registration using another name. When you file for LLC formation, you register your business name with the state so no one else can use it.

How To Create an LLC for Your Home-Based Business

Forming an LLC is easy. You can file Articles of Organization with the Secretary of State’s office in the state where you operate your business. As a sole proprietor, you can form a single-member LLC.

To form an LLC, complete articles of organization and submit them to the Secretary of State’s office in your state along with the requisite filing fee. The information you need for the articles of organization includes:

• The business name of your LLC

• The business address of your LLC (your home address)

• The registered agent's name and address

• The business purpose

Since you reside where you operate your business, you can be your own registered agent and not have to pay for registered agent services.

Creating an LLC is a straightforward process, you can do it yourself or use an online business formation service company.

After LLC Formation

Once you receive a Certificate of Formation from the Secretary of State, there are other steps to take for your home business.

Apply for an EIN

An Employer Identification Number (EIN) is like a Social Security Number for your business entity. You use it to open a bank account, get a business credit card, apply for business licenses, and tax purposes. It is easy to apply for an EIN with the IRS online.

Open a Business Bank Account

It is critical to separate your business activities from your personal finances. Open a bank account under the LLC name to receive income and pay business expenses. You may need to show your Certificate of Formation and EIN to open a business account.

Get a Business License

Find out what business licenses and permits you need for your home-based business. Consult your state and local jurisdictions for requirements. Check with your homeowner’s association (HOA) or with zoning laws to see if there are any special requirements for your type of business.

In summary, forming a limited liability company (LLC) for your home-based business is a smart choice with many benefits. An LLC helps protect your personal belongings, like your house and car, from any problems your business might face. It also offers flexible tax options, which can help you save money and make it easier to manage your finances. Plus, registering your business name as an LLC ensures that no one else can use it, keeping your brand unique.

If you are planning to run a new business from your home or already have a home-based business startup, take the necessary steps to protect your personal assets and enjoy the tax benefits of an LLC business formation.