Whether you barely started your home-based business or you’ve been in business for a couple of years, you should strongly consider organizing it into a Limited Liability Company (LLC).
Even if you don’t plan on expanding your operations or adding new employees, incorporating into an LLC can do away with many of the risks home-based businesses face. In this post, we will discuss the 5 benefits of incorporating your home-based business.
What is the Best Business Entity For a Home-Based Business?
There are many different business structures available, but the best option for a home-based business is an LLC and here is why.
What is an LLC?
An LLC is the simplest and most flexible business structure for a home-based business to form and maintain. It provides the benefits of both a partnership and a corporation. It can be formed by one or more individuals and protects the personal assets of the owners in the event the business goes bankrupt or is sued.
Why an LLC is the Right Choice For Your Home-Based Business
An LLC is straightforward to form and maintain that you can do it by yourself without needing to hire professionals or have specialized expertise. The initial paperwork and fee requirements are minimal to form an LLC. It is important to pay attention to the rules and requirements relating to fees and taxes in the state in which you’re forming an LLC.
LLCs protect owners from being held personally responsible for lawsuits, loss of personal customer information, or products damaged by the company. In fact, protection is the most important reason why you should incorporate a home-based business because once you begin transactions you are more prone to lawsuits.
You should know that once you are involved in a lawsuit, it is impossible to form an LLC to protect your personal assets. Therefore, make sure to form the LLC in advance.
Top Reasons to Incorporate Your Home-Based Business
With any business you are always exposed to a risk of a lawsuit, even in cases when you’re not operating in an industry that would attract lawsuits.
As a home-based business you can be held fully responsible in a lawsuit. You also run a very high risk of losing your personal assets like your personal savings, home, or car in this event.
1. Personal Asset Protection
The strongest and most common reason to set up an LLC is to protect your personal assets. By setting up an LLC, you are forming a separate business entity, which is legally separate from its owner(s).
As a result, it creates a buffer between your personal assets and any obligations, debts, or any misdeeds of the business.
The LLC's members are not held personally liable for the business' obligations. If the business can't pay its obligations (rent, loan payments, business suppliers, etc.), creditors can only pursue the LLC's assets. The LLC's members risk losing the capital they have put into the business and protecting their personal assets (home, car, etc.).
In correlation to personal asset protection another big advantage of LLCs is that they provide a strong level of privacy.
You are not legally required to disclose the identities of shareholders or members of an LLC. In some states, such as Nevada and Delaware ownership information is not made publicly available. By safeguarding your personal information with an LLC it can prevent harassment or stalking from customers and creditors.
To ensure that your home address remains private, you can include in your business documents a business address, such as a low-cost mailbox. This is beneficial because it removes your home address from public business filing records and will add another layer of anonymity.
Something Else To Consider for Privacy Protection
All LLCs are required to have a registered agent assigned in the state where the company is formed or in which it is doing business.
A registered agent’s job is to receive official documents, such as lawsuits, summons, subpoenas and official state documents on behalf of an LLC. They ensure that notifications are given to the relevant individuals in the LLC or corporation.
While requirements for registered agents vary according to states, a necessary condition for every registered agent is to have a physical office in the state where the business is registered.
Also, the registered agent must be available at the physical street address during normal business hours to receive legal documents.
You could act as your company’s registered agent or assign the role to a friend or family member. These are the easiest and cheapest options, but your personal information will be publicly available if you choose to act as your own registered agent. This role also comes with a lot of responsibility if you assign it to yourself, friend, or family member.
For example, if your business is sued, then you will have to handle the notification called a service of process correctly. If you make a mistake, your LLC could miss a crucial deadline to react and face serious legal issues, penalties, and fines.
The third and best option is to use a registered agent service because they will handle notifications immediately, correctly, and it will also add to your privacy. You can use the address of the registered agent service for public documents. You will also be able to focus on your business without worrying about all the confusing documents you need to fill out to avoid serious consequences.
3. Professional Business Image
One of the drawbacks of running a business from home is that you can come off as amateurish. When you work out of your home you must pay attention to your professional appearance.
In addition to providing asset and privacy protection, an LLC will help your home-based business achieve a professional business image for the following:
- You are registering your LLC on a domain and other public websites. If you live in an apartment or prefer not to expose your home address on your business materials consider getting a virtual address or other business address option. A professional business address on top of an LLC is the ultimate professional package.
- Opening documents with your suppliers and vendors.
- Receiving statements, invoices, payments, and bills.
- Filing for legal contracts, licenses, and permits.
- Communicating with your customers such as when people search for your business on Google Maps or do a general search.
If you are a home-business establishing a wall between personal and business credit is very difficult because lenders will look more heavily at your personal score and debt.
By forming an LLC it lets you establish a new and separate credit profile to begin building business credit. This means that even if you have poor personal credit, you can structure your new business in a manner that allows you to build a solid credit profile for your LLC.
As a result, you will be eligible to receive loans, credit cards, lines of credit, etc. that you otherwise would not be able to obtain as an individual and often at better interest rates.
Another benefit that an LLC gives business owners is more flexibility, which improves their financial preparedness. For example, in the event of a financial emergency or slow cash cycles for your business, business banking usually can offer a vital line of credit for cushion.
It’s also easier for your home-based business to raise money from banks or investors if it is set up as an LLC because an incorporation is often a prerequisite. Banks and investors may be reluctant to loan or invest money in a sole proprietorship (i.e. yourself).
To achieve the best funding opportunities for yourself it is important to manage LLC finances separately from personal and conduct business through a separate business bank account. It is critical to maintain proper funding and avoid misrepresenting or distorting material facts related to finances for third parties such as lenders and investors.
So What Is The Perfect Solution?
First-time business owners often recognize the large advantages of an LLC, such as personal asset protection, privacy, and a professional business image. It will also give you more credit and funding opportunities as you grow and expand with lenders and investors. Overall, an LLC is ideal for virtually any kind of business you decide to run from home or plan to one day.
Do You Need A Registered Agent Service?
Save over $100 a year compared to using a dedicated registered agent service. VirtualPostMail Registered Agent Service is available in every state where we have a location.
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