A Limited Liability Company offers many benefits to those running an LLC from home.
Would you like to run your LLC from the comfort of your home? There are many people that can turn any hobby that they have been into a successful business.
Would you like to operate your LLC from your house? People can run their business successfully, even if it is a hobby. However, it’s important to understand that these are two different things. A home-based business is going to have both disadvantages and advantages. There are steps that you will need to take in order to improve your ability to succeed at any new venture that you tried.
Learn more on What is a Limited Liability Company?
Hobby Versus Business: The Breakdown
The IRS has stated that any income that you make must be reported in regard to taxes. If you have a weekend gig that you do on a continual basis, or if you are selling advertisements on your blog, all of your income must be reported on your tax return. Some people enjoy a home business, yet they may lose money the very first year that they try this out.
The activity of a legitimate business is what the IRS will need to know about so that you can not only pay your taxes but show that you have had a financial loss allowing you to use deductions. For many people, this is a very easy way to decrease how much you will have to pay in taxes until your business becomes successful.
The IRS will look at your home-based activities, primarily as a business, even if it is a hobby. These activities, if they make a profit, will be evaluated, particularly if it has made money three out of the last five years. In most cases, the second-year criteria will not apply. This type of scenario, from the perspective of the IRS, can lead to asking the following questions:
Does your business have a particular structure?
Does your business involve advertising or marketing with the intention of actually generating revenue?
Do you maintain good financial records?
Does your business have a bank account?
Does your business have an official name?
When the IRS looks at all of these activities, especially if you are perceived to want to generate profits, this will be of great interest to them. If this is the case, you are allowed to do the following:
Deduct business losses from the total amount that you have made in sales.
Deduct expenses from this income that you have made.
How to run a business
if you are currently operating a business, there are obligations that you must consider. These will include:
City, state, county, and also federal laws.
Every business owner that begins to do research on what their obligations will be should do so prior to opening a business. Once you understand what these requirements are, and you are able to identify your costs, plus the paperwork you will need to fill out, you can then begin to get the licenses and registration numbers that may be needed for operating your business.
What is an LLC?
If you want to have maximum protection of your personal assets, starting a local LLC is a good idea, primarily because it will allow you to pass through taxation through this partnership of sorts. The structure of the business should be identified whether you are running a small business or a home-based business. Once you start an LLC, you will likely have at least one member. This is dissimilar to a partnership because there is only one person which would likely be you. These structures offer a lot of flexibility, plus you will be able to manage your LLC much more efficiently than a corporation.
When looking at a sole proprietorship, you can see that an LLC has many different advantages:
Liability Protection: if you are a sole proprietor, and you are sued, the assets that you own are not protected. A judgment creditor can garnish your wages, freeze your accounts, and even place a lien on your home if you are not properly protected. That is why many people get an LLC because it offers them this type of protection, limiting the number of debts and liabilities that they will be responsible for. Business assets are the only thing that can be used as a monetary payment in regard to a lawsuit that you may be facing.
Tax reductions: Your LLC is not going to be taxed like a separate entity. All of the profits and losses that you will experience are passed through to the owners of the LLC. All of the members are required to make reports on losses and profits when they file their tax returns.
If you do own an LLC, you do have the option of obtaining an entity taxed as if you have an S corporation. If this is approved, you should be able to generate a reasonable amount of money for your salary which is going to be subject to taxes.
Once you have done this, the remaining profits of the business can be distributed. Any funds that are not distributed will not be included in self-employment tax calculations.
There are several benefits to owning an LLC. This includes:
There is less paperwork and administrative requirements.
There is flexibility in ownership.
There are various management structures.
There is increased credibility for your business.
There is free interest transferability.
In general, LLCs are going to be much better for your business than sole proprietorship’s, corporations, or partnerships.