Being a home business owner isn’t always easy. Even with all the common protective measures set up to protect your business and minimize risks, some things can still go wrong.
The good news is many home business owners are forming limited liability companies (often called LLCs) to protect themselves against risks that might not be worth taking on.
This article explains how to use the LLC business structure to protect your home business and your assets. First of all, it acknowledges how most home businesses are sole proprietorships and highlights how sole proprietorship is not a sustainable model.
If you have been considering registering your home business as an LLC, hopefully, this article will convince you regarding your decision.
What Makes Sole Proprietorship Unsustainable?
The default business structure is the sole proprietorship. If you start offering any products or services from home as an entrepreneur, even without formal registration, the government regards the business as a sole proprietorship, unless registered otherwise.
As a sole proprietor, you have complete and ultimate control over your business operations and processes. As the ‘alpha and omega’ of the business, the business is you, and you are the business.
However, this has concerning implications. The biggest effect of this is that your business’s assets and liabilities are not distinct from your assets and liabilities legally.
If your business runs into debt or goes bankrupt, you are held personally responsible. And if your business runs into any legal setbacks, your personal assets may be confiscated as a consequence.
More so, since the owner as a person is legally the same entity as the business, if the owner passes away, the business also ceases to exist. That’s unless the person had made legal arrangements to hand over their business assets to someone else after death and transfer ownership.
In essence, the sole proprietorship business structure is not secure nor sustainable. Some sole proprietors may protect their assets by separating their business assets and financials from their personal assets and financials.
However, this is at best, simply a way to keep the business owner accountable and disciplined in business management. Effectively and in theory, this makes no difference in the eyes of the law.
Legal Protection and Business Liability
Why then do people become sole proprietors? It’s because it has the lowest barrier of entry of all business structures. In fact, you don’t need registration; once you start business operations, your home business is officially a sole proprietorship.
However, there is no legal protection. And this should be a big concern for business owners. You don’t want your business to interfere with your personal life and inconvenience you to such an extent that your personal belongings may be seized to pay business debts and fines.
And yes, a business may run into debts for reasons not related to mismanagement. Although, that is not the focus of this article. The focus here is to explain how you can legally protect yourself and protect your home business by using an LLC business structure.
A limited liability company (LLC) is a distinct legal entity from its owner(s). It is this distinction that’s called limited liability protection.
Therefore, if, for instance, your LLC acquires a great amount of debt that it can’t pay back or eventually gets liquidated, your personal assets such as houses, vehicles, bank accounts, etc. are protected from any legal sanctions including confiscation.
As an LLC owner, the only risk you take on is the amount of money invested into the business. However, the owner is still liable for any personal wrongdoing committed in running the business, such as defrauding a customer.
How an LLC Structure Protects your Home Business
Overall, using a good LLC structure does your home business a whole lot of good, especially in raising capital, seeking loans, and flexibility. An LLC is often regarded as a hybrid between the sole proprietorship (mostly home businesses) and corporations (large enterprises).
As an LLC owner, you avoid both the personal liability of sole proprietorship and the stricter tax regimes that apply to corporations. So, in a way, an LLC offers the best of two worlds.
More so, since the owner(s) of an LLC are legally separate entities from the company, the death or incapacity of an owner (even if the only owner) does not result in the liquidation of the company.
LLCs are easy to start and run, once you get the hang of the registration processes, which differ by state. By forming an LLC for your home business, you can save yourself and your business a lot of stress and risks.
An LLC is likelier than a sole proprietorship to raise investments, take loans, and carry out other significant business obligations, mainly because other entities are more trusting of an LLC than a home business that’s a sole proprietorship.
Conclusion
One of your greatest fears is getting into legal problems because of your business activities as a small business owner. Limiting your liability and keeping your doors open for business is key to being able to maintain a thriving home business.
If you’re considering using an LLC to protect your home business, you should probably do it and this article has offered you tips to keep in mind.
Interesting Related Article: “Starting Your Own LLC Business: A Step By Step Guide“