Why You Should Consider Upgrading Your Home Business to an LLC

Why You Should Consider Upgrading Your Home Business to an LLC

The global health crisis has challenged everyone’s financial capacity as many have been let go from their jobs or had to postpone career opportunities. To cope with the economic fallout of these distressing times, others have come up with ingenious ways to make money from home — from online baked goods and boutique clothing stores to virtual jewelry shops and much more.

But while most small home-based businesses operate on a sole proprietorship basis, there comes a time when it’s good to consider other options, especially when you want to grow and expand your business. This is where Limited Liability Companies (LLCs) come into the picture.

Below, we’ve listed the top reasons why you should consider upgrading your home business into an LLC.

1. Increased market credibility

If you want to establish your home business’ credibility, it might be a good idea to change your business structure to an LLC. Sole proprietorships and general partnerships are considered informal business entities, which might hinder you from attracting new customers or serious investors.

When changing your business’ name, be sure to choose one that is memorable and doesn’t include restricted words. For example, the New York State Department of State restricts certain words such as “lawyer” and “doctor” unless your LLC meets certain conditions. However, for all states, you’ll have to add “LLC” at the end of your business name once you officially register to make the switch.

2. Tax benefits

What’s great about LLCs is that they can help reduce your tax burdens. While the tax differences between LLCs and sole proprietorships aren’t too different, some benefits make it worth switching to an LLC. For instance, LLCs are exempted from double taxation since owners only have to pay personal taxes. There are also fewer regulations than corporations.

Take note; however, that tax requirements can vary per state. When setting up an LLC in Illinois, you’ll need to pay self-employment taxes for Social Security and Medicare. And if you’re a vendor who collects sales tax, you’ll need to apply for a sales tax license through MyTax Illinois. Meanwhile, other states like Montana and Alaska don’t have sales tax rates at all. These are the guidelines you need to take note of. Again, do your due diligence and determine what kinds of taxes your home business needs to pay to avoid fines and legal problems.

3. Less financial and legal liability

Every business owner knows the importance of separating your personal assets from your business’. It’s true that establishing a sole proprietorship is easy, as you only have to file the necessary documents and obtain local licenses. But you’re still fully responsible for any financial or legal liability that your home business might face. As we’ve mentioned, this can leave your personal finances vulnerable to fines, lawsuits, and debts.

On the other hand, incorporating as an LLC limits your liability and absolves you from your home business’ legal obligations. It also provides some protection for your assets from creditors. However, Small Biz Trends points out that creditors can still potentially bypass the wall of security an LLC has established between your business and personal assets. This can happen if another member has merged any amount of their individual assets into company assets or if they have a record of committing fraud. To find a more extensive way to protect your assets, it’ll help to seek the advice of an estate planner.

4. Expanding your business partners or employees

Incorporating as an LLC is one way to future-proof your home business. Most home businesses start as a one-person job or a tight-knit team ⁠— and this can provide great results for most people. But if you want to scale up, you’ll have to hire a few employees or find partners to pool your assets with. Hiring employees is much easier in an LLC, as you only need to obtain an Employer Identification Number (EIN) to start. Adding shareholders into your LLC is also straightforward as you’ll probably have an operating agreement with all the rules set in place.

Upgrade Your Home Business To An LLC Summary

Without a doubt, your home business has a better chance of growth and success as an LLC. If you want more tips on making money from home, be sure to check out our other posts on Frugal Reality.

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