Is it Time to Go Corporate with Your Home Business?

If you work from home, chances are (what with tax season ending and all) that you are noticing that you pay a pretty hefty chunk of change. And once you reach a certain threshold, it becomes almost unmanageable to pay your taxes. After all, you don't have an employer helping you out by paying a portion of your taxes. You are responsible for a self-employment tax plus and income tax. And if you are making a significant amount, it might be time to consider upgrading your sole proprietorship to an LLC.

Sole proprietorship

The nice thing about a sole proprietorship is that it is easy. You don't have to file any forms, or get a business license. You can use your Social Security Number as your tax-id. And you can still take business deductions for expenses related to your home business. However, there aren't many tax benefits beyond those deductions. And you still have to pay self-employment tax on a large portion of your home business income.

LLC

This is where the LLC comes in handy. You set up as a limited liability corporation, and it provides protection that a sole proprietorship can't. If someone comes after your home business assets, they can't attack your personal assets, and vice versa. Additionally, there are tax benefits. You have to have at least one other person to set up an LLC. In my case, it is my husband. You can set up as a controlling partner so that you have the decision making ability and the other person is simply designated as a general partner. This is what I did. It means that if we ever get divorced, I'm still the one who makes the decisions with the business, and control it.

The tax benefits come in when you look at how an LLC is taxed. It isn't. And there is no tax on the distributions. We have it set up so that my husband gets 94% of the distributions, and I get 6%. It doesn't matter to us, because it all ends up in the same place. (If we get divorced, as controlling partner, I can change the distribution set-up.) This means that I only get charged self-employment tax on 6% of what I make in my home business. Instead of owing $12,000, I owe $4,000. We still pay income tax, though, on the total amount earned.

Setting up an LLC

It is fairly easy to set up an LLC. You can do it online, with help from websites and forms. But it is easier to go to an accountant. For between $150 and $300 (depending on where you live) you can have your LLC set up. Most accountants take care of the necessary paperwork, including the Articles of Organization and the paperwork needed to get a business license in your state (you'll have to pay extra for that).

Disclaimer: I am not a tax professional. Consult with a tax professional before making any decision concerning your business or personal financial situation.