When you first start your home business, you may wonder how to setup your business correctly. Most entrepreneurs who work from home with 1 to 2 employees would register an LLC.
An LLC is not a separate entity like a corporation. Instead, the IRS calls it a “pass-through entity” where all the profits and losses of the LLC pass through to the owner(s).
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An LLC protects you and your personal assets, including your car, home, and bank accounts from liability if you're ever sued or go bankrupt. With an LLC, you get to choose how you'll be taxed. Unlike a corporation, you aren't required to have a board of directors or shareholders when you set up your business as an LLC.
Let's break down the four steps to setup your LLC with the “small business” tax status to save money on taxes.
How to Setup Your Home Business to save on taxes and be legally protected. ##corporation ##setup ##setupbusiness♬ original sound – thebusinesskid
Step 1: Check Your Business Name
Before you setup your LLC, make sure your business name is not already taken. Click here to check your business name availability.
LLC stands for Limited Liability Company and it's a type of business structure that lets you classify your business as a separate entity from you personally. This allows you to keep your personal assets separate from your business assets while protecting them from your business' debts and liabilities, including potential lawsuits.
What Can I Do with an LLC?
You can open bank accounts, hire employees, and obtain licenses and permits under your LLC. And all it takes is an annual filing fee with the state to keep your business in good standing to maintain your business status.
Step 2: Register an LLC
- LLC as a sole proprietorship
- S Corporation Tax Status
Before you can fill out the form to create your LLC, you'll need a registered agent. A registered agent simply accepts responsibility for receiving correspondence for your business, usually tax notices and reminders of upcoming business deadlines. You can become your own registered agent if you live in the same state and have a mailing address. You can also hire a company to receive correspondence on your company's behalf like this one.
Once you determine your registered agent, you'll use their name & address to fill out the form to setup your company. It looks similar to this one. If you're looking for any help with LLC setup, then our partners at Incfile will help you file any paperwork for $0. Plus, they have a team to assist with any questions. Click Here to Get Started with Incfile
Step 3: Apply for an EIN
An employer identification number (EIN) is a nine-digit number assigned by the IRS. It's used to identify businesses. You'll use this EIN to open bank accounts under your business name, to open merchant accounts to process credit cards, and to receive affiliate income from different brands.
It takes less than 10 minutes to get an EIN, and you can click on the APPLY ONLINE NOW button here.
Step 4: Fill Out Form 2553 to Claim Small Business Tax Status
Once you have your EIN from step three, you can fill out form 2553 to claim your tax status “small business”. This will give you the s-corp status that allows you limited liability protection while saving taxes.
The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions. The S corp pays its employees a “reasonable” salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.
Click Here to Fill Out Form 2553
Can you save money as an s-corp?
Let's say you earn $80,000 in net profit, which is revenue minus expenses. You'll pay a 15.3% self-employment tax, which is $12,240.
However, if you are set up as an s-corp, here's how you save money. After you pay yourself a salary, whatever money is leftover you would pay yourself and call this a dividend.
Back to the example with s-corp status.
- $80,000 net profit
- $40,000 reasonable salary
- $40,000 leftover paid as dividend
- 15.3% x $40,000 salary
- $6,120 taxes.
So now you save over $6,000 in taxes just by setting up your structure this way with the s-corp tax status.
Who else came here from TikTok?
Hey! Would you mind if I share your blog with my facebook group?
Saw your tiktok – thanks for the great content.
Sounds good, Brendan. Also, we have a pretty active TikTok channel @thebusinesskid .. Feel free to share the training with your group. Thanks!
I just setup my business as an LLC. What do I do to switch it over to the s-corp?
I am setting up my t-shirt business. Do you recommend getting a trademark on my company name?
Yes. The first trademark you want to file is a “plain text” trademark on your name (Reebok, Nike, Apple, Coach, etc.) without any claim to the font or text color. Right? That gives you the rights in the name regardless of your logo. After you have the first trademark, then, you can decide to file for your logo. You can trademark the logo and the symbol. Usually, to get approved for the symbol, it needs to be used on the tag itself or attached to the product somehow (like the box, the packaging, the sewn-in tag). Think of the polo symbol or the apple symbol or the Nike swoosh.
Saw you on TikTok and the content is amazing. Thanks for everything!
I already have an LLC. Can I switch to the s-corpation?
I suspect you have already completed steps 1 through 3. Now – you just need to fill out form 2553 in step 4 to add the s-corp tax status.
Came here from TikTok. Thank you for everything.
Right now I have an LLC but want to convert it to the s-corporation. How do I do that?
If you have an LLC, then most likely you have completed steps 1 through 3 above. If you have an EIN, then complete step 4 and fill out the form 2553 to add the tax status. You’re still an LLC – with the s-corp tax status.
came here from tiktok and need a little help with find the right form for my business
I have a question, what if I don’t want to use my own address on the package I send out to my customers? How can I go about that?
You could register a PO BOX at your local UPS store. The one near me charges $10 to $30 per month for your own address / mailbox.
What is the Incfile offer? What do they setup for free?