So, you’re starting a home business, and you want to do it right. You know there are financial reporting requirements and legal liabilities ahead, and it’s better to get ahead of them sooner rather than later. I can relate.
A good place to start is by setting up an LLC for your home-based business.
An LLC provides several benefits, particularly for home businesses and entrepreneurs. And the lengthy procedure of forming an LLC will be easier to follow once you know the legal criteria. Although each state has subjective norms and regulations, some steps are universal.
Here's a quick rundown of the basics and several points to consider when forming an LLC for home-based business entrepreneurs.
What is an LLC?
LLC is an abbreviation for Limited Liability Company. A Limited Liability Company is a legal business that protects your personal assets in undesirable and unfortunate situations, such as being sued.
An LLC is easier to form than a corporation, and provides greater flexibility and security to its owners.
Any company or individual in the US can form an LLC.
Both are running a business, and holding assets are possible with an LLC. Although any organization or individual can form an LLC, banks and insurance companies cannot. Also, the laws governing LLCs vary from state to state.
One of the biggest advantages of forming an LLC is that the members can divide the profits and losses of the firm in any way they like. It does not have to be equal.
Another important feature of an LLC is that every member claims their percentage of the profits and losses on their personal income tax return.
The steps below will show you how to form an LLC for your home-based business, whether you're just starting out or a seasoned entrepreneur. Of course, as mentioned earlier, there are variations from state to state, for example… how to open an LLC in California.
So, in addition to this guide, you must also conduct specific research and follow your state's requirements.
How to Set Up an LLC for Your Home Business
So you've reached this important milestone; starting your own business. Fortunately (or unfortunately, depending on how you look at it), setting up your LLC will probably be one of the easier things you do in and for your business.
Here are the steps you'll need to take…
Step One: Name Your Business
Your first step in forming an LLC is creating a name for your company. Your business name should reflect your company's personality to boost your branding and image. And it must also meet your state's legislation criteria.
The business name should be approved after it has been checked against the current LLC database for duplication.
To be on the safe side, make sure you choose more than one name; if one is already in use, you will have at least one backup name. It's also necessary to use one of the allowable designators (endings) in your name. For example…
- (Business Name), Limited Liability Company
- (Business Name), LLC
- (Business Name), LLC
- (Business Name), Ltd
You can also choose a DBA (doing business as) name for your LLC, which is helpful if your business spans multiple products, services, or niches.
Your state will have its own registration fee, and the registration cost will vary from… you guessed it… state to state.
As a result, even though some businesses claim to provide “free” LLC formation services, what they really mean is that they will fill out the paperwork for free, but there is still a cost.
Step Two: Choose a Registered Agent
A Registered Agent is a person or appointed corporate representative who receives legal documents on behalf of your company, and you are required to have one.
They exist in the (hopefully unlikely) event your LLC is involved in a lawsuit, which may be why you're setting up an LLC in the first place.
In the case of a lawsuit, the complaint or notice of action is served to the Registered Agent. The notice is then forwarded to you.
You can also act as your own registered agent if you reside in the state where your LLC was formed.
It's also vital that your agent, whether you or someone else, is available during regular business hours.
Step Three: File the Articles of Association
Articles of formation, also called certificates of formation or articles of organization, set the rules and regulations governing an LLC. Some states use different names, but they mean the same thing.
Each state has its own filing offices as well. For example, Arizona files with the Arizona Corporation Commission, while Maryland files with the State Department of Assessments and Taxation. Regardless, they usually end up with the Secretary of State's office.
So, you'll need to file with your state's agency that handles business filings.
Filling Out The Application
You will need to enter basic information such as your business name, address, and contact information of the Registered Agent.
An LLC Organizer must also sign the application. This is simply the person submitting the Articles of Organization to the state. It's usually an LLC Member, but it doesn't have to be.
A filing fee, which changes from state to state, must be paid when submitting your Articles of Organization document. Therefore, review the document before doing so. Once your paperwork has been approved, a certificate showing that your LLC has been correctly registered will be issued.
Articles of Formation Standard Conditions
While many aspects of the Articles of Formation vary from state to state, some standard conditions apply in every state that you should be aware of…
- The LLC's name has to be distinctive in YOUR state to be accepted by the filing authorities.
- The headquarters of the LLC's address is required.
- The LLC's registered agent's name and address must be in the same state you're filing.
- A statement declaring whether the LLC will be managed by its members or a manager.
- Members' signatures and, in some cases, their addresses are required.
- A purpose statement is required.
- Management guidelines are required.
- The time frame for the LLC (“perpetual” is acceptable in most states)
Step Four: Create Your LLC Operating Agreement
An Operating Agreement specifies the financial, legal, and management rights of all LLC members. This is obviously critically important.
It outlines how profits will be divided, how members may leave the LLC, and who may invest funds in the company, but it's optional in some states.
Still, you should prepare one. These factors are easier to sort out in advance rather than being argued later in a potential dispute.
LLCs formed by a competent attorney will also explicitly define the rights and responsibilities of all members or partners and draft an Operating Agreement for your review.
If you are the single owner of your company (or an owner in a Multi-Member LLC), you can create your own Operating Agreement with the help of several free templates available online.
Step Five: Apply for Licenses and Permits (If Required)
Finding out about state or local license/permit requirements is a good next step.
For example, some businesses require a license or permit, such as someone running a food truck, a child daycare, or a hair salon.
But not all businesses require a license or permit, so you'll need to check with your state and city/town to find out if you need one.
After the LLC is created, most states also require you to submit an annual report with the most recent information about the LLC, along with the required filing fee.
Step Six: Get Your Employer Identification Number (EIN)
The Internal Revenue Service (IRS) issues an employer identification number (EIN), a special nine-digit number used to identify your business for tax filing and reporting.
With an EIN, employers can open a business bank account, apply for specific business permits, and submit taxes to the IRS quickly and efficiently.
EIN applications are free and can be found on IRS.gov.
Advantages of Running an LLC from Home
Here are a few of the benefits that home-based business owners gain from operating an LLC:
A significant benefit of establishing a home-based business for most people is that it's less expensive than a traditional business, especially if you're a start-up or running an online business.
For example, establishing a business is infinitely easier when you don't have large lease payments and big bank loans, building insurance, office renovations, and even commercial cleaning requirements.
In certain circumstances, you can deduct a portion of your business expenses under the home office tax deduction.
The main requirement is that your house be the primary business location for your home-based LLC. It shows that administrative or management activities for your LLC are performed from your residence.
We recommend checking with a local accountant to check your eligibility for the home office tax deduction.
Even if your house does not meet the requirements, you can still claim a tax reduction. Other conditions in accordance with your state's rules must be met to achieve tax benefits, which, again, can be provided by your local accountant.
Imagine not having to leave your house for work. No traffic, expensive commutes, annoying coworkers, or cruel boss.
Depending on the type of home business you're running, you might even be able to ditch the alarm clock.
Perhaps, the biggest benefit of running a home-based business is that you can start and end your day whenever you want and craft your own work-life balance (if balance is your thing). In addition, by avoiding the commute, you will almost certainly improve your mental and physical health.
People who work from home save money on fuel, car maintenance, transportation, parking fees, a professional wardrobe, out-of-pocket lunches, and other expenses.
So it's not uncommon for home business owners to move away from expensive cities and neighborhoods to live a more manageable and stress-free life.
To summarize quickly, the main steps to setting up your LLC are:
- Name Your Business
- Choose a Registered Agent
- File the Articles of Association (aka Articles of Organization)
- Create Your LLC Operating Agreement
- Apply for Licenses and Permits if Required
- Get Your Employer Identification Number (EIN)
Setting up an LLC is important. It can help protect your personal assets in the event of a lawsuit. And it provides other substantial benefits to home-based business owners, including lower expenses, tax savings, and lifestyle benefits.
It's also a manageable step for home-based business owners, and although it's not the most convenient thing to do, it can also be fun and enlightening.
It involves some important and creative decisions, such as coming up with the type of business you want to start, your business name, and who you want to start it with… if anyone.
Of course, it also requires some less-than-fun activities such as choosing a Registered Agent, going over all the legal mumbo-jumbo, filing the Articles of Organization (or similar form), drafting an Operating Agreement, getting an EIN Number, and opening a business bank account (you want to get paid right?).
Being your own boss may be time-consuming, but it can also be a lucrative endeavor. All the best!
Matt Horwitz is the founder of LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, Entrepreneur Magazine, and US Chamber of Commerce. Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. LLC University®, established in 2010, was the first company to create free LLC courses in all 50 states.