LLC For Handyman Businesses
The type of employees you hire, the location where your business is set up, and your sheer determination are all important factors in determining the success or failure of your business. However, choosing the right business structure for you is also paramount.
An LLC is a type of entity that has become well-known over the recent years. Operating your handyman business as one can provide numerous benefits and ensure owner-friendly short and long-term policies.
What Is An LLC?
A Limited Liability Company, or LLC, is a type of legal structure that shields its owners from the personal obligations of taxes, debts, and liabilities incurred by their business. It combines the attributes of two other structures, sole proprietorship, and corporation, making it a good middle ground for business owners who want to save on costs but enjoy more flexibility, credibility, and other benefits.
What Are The Advantages Of A Handyman LLC?
LLCs provide several advantages, making them the business structure of choice for many handyman startups. Here we enlist a few of the key benefits.
Limited liability protection
The “Limited Liability” portion of the term “LLC” indicates a type of asset protection its owners can enjoy. You will only be partially liable for any legal consequences your business incurs, such as debts, court rulings, and others.
For example, if a handyman messes up and the customer decides to sue for damages, it will only be the business that is obligated to pay for it. You will never be asked to turn over your home, bank accounts, and other personal assets as collateral.
Trust & credibility
Credibility and consumer trust are important factors to any business’ success. For a handyman, a lot of trust can be generated by simply becoming an LLC. During formation, you will be able to choose a legal name to register your business under (unlike sole proprietorships) and even register a business address.
Speaking of trust, it can also be gained from banks. LLCs are allowed to loan and open a bank account under their name without additional documents.
Uniqueness & professionalism
As mentioned, an LLC provides legal identity and credibility to your company by allowing you to assume a unique name. If you are an informal business owner and operate your company under an assumed DBA (doing business as) name, you have no legal copyright. In fact, another handyman company can use your DBA as their own and establish a business with that name. Incorporating your business as an LLC provides name exclusivity and rights.
By default, an LLC is a business structure that follows pass-through taxation, similar to sole proprietorships. This means that the company itself does not pay taxes separately. Instead, the profits and losses “pass through” to the owners, who report them on their individual tax returns. This avoids the double taxation that larger corporations face, where the company is taxed on its profits and the owners are also taxed on their salaries.
You can also choose to tax your handyman LLC as a corporation to enjoy the limited benefits of one. We will discuss this in subsequent sections below.
What Are The Disadvantages Of A Handyman LLC?
Even though LLCs provide great benefits in terms of ease of operation and taxation policies, it is not suitable for all businesses, especially those that require low capital investment. Here is why.
In any state, establishing an LLC is more expensive than establishing and running a sole proprietorship or partnership. To create an LLC, some states even require that you hire a professional registered agent. Jurisdictions also sometimes charge LLCs additional costs for things like yearly reports and/or franchise taxes.
Transfer of ownership
Transferring ownership in a handyman LLC can be a complex process, especially if yours has more than one owner. For example, a majority vote of the LLC’s members is needed to add new members, alter the ownership percentages of existing members, or transfer ownership. You will also need to resubmit paperwork (with additional fees) if an LLC member leaves or gets added.
Comparatively, corporations have an advantage over LLCs when transferring ownership, as their procedures are generally simpler.
How To Create A Handyman LLC
Although some states use somewhat different processes, they all share the same fundamental steps in establishing an LLC.
- Choose a name
- Hire a Registered Agent
- Submit a Certificate Of Organization
- Get an EIN
- Draft an Operating Agreement
Choose a name
To form an LLC, first select a name for your company structure that complies with your state’s naming regulations. For instance, you cannot share the same name as another firm in the state, even if it is only implied. You can view the naming requirements for any state online on the Secretary of State’s website.
Hire a Registered Agent
Most states require an LLC owner to hire a registered agent, though if your state permits anyone to be a business agent, you can register your own name as well. This person or business is responsible for receiving and managing legal and official documents on behalf of the LLC. If you are not knowledgeable in accounting and LLCs, it is best to leave the job to a professional—even if it costs you extra.
Submit a Certificate Of Organization
The next and most important step in LLC formation is the submission of your Certificate of Organization (known as the Articles of Organization in some states). This is a document that contains crucial information about the LLC, its objectives, members, and administrators. It also establishes the objectives of your LLC, ensuring that it adheres to the regulations set by your local authorities.
Get an EIN
Next, obtain an Employer Identification Number (EIN) from the IRS. You can use this number to set up business bank accounts, take care of different taxes, and employ other handymen when you scale. You can apply for an EIN at no cost. Simply visit the IRS website to start your application.
Draft an Operating Agreement
An Operating Agreement is a document that details the framework for your management structure, ownership percentages, and financial responsibilities. It is not required, but it is crucial for the efficient operation of your company, especially if you plan to transfer its ownership down the line.
How Are Handyman LLCs Taxed?
The IRS does not have multiple criteria for taxing handyman LLCs. Instead, you can choose how you wish to be taxed. By default, a single-member LLC is taxed as a sole proprietorship, and multi-member LLCs are taxed as general partnerships. However, you also have the option to tax your business as an S-Corp or a C-Corp.
Sole proprietorships & partnerships
In both of these tax structures, you will be responsible for paying taxes on the profits earned by your handyman business. Called pass-through taxation, the profits “flow through” your personal income tax return, where they are reported and taxed accordingly. The handyman company itself does not pay separate taxes on its profits.
If you are earning more, experts might recommend that you shift to an S-Corp tax structure for your LLC eventually. Jumping from our point above, corporation-type business owners are required to pay two taxes: one on their income/shares and another for their company. Depending on how much your handyman business is easing, taxes can be lower if you shift to an S-Corp, as you can declare a lower salary and enjoy other benefits.
A C-Corp taxation option is also available for LLCs. However, it is less popular with small business owners as it is costly to maintain.
What Are The Costs Of Starting A Handyman LLC?
Starting a Handyman LLC might seem like an expensive venture, but in comparison to other corporate structures, you will not have to spend as much. In fact, below are the only key expenses to consider:
State filing fee
Registered agent service
LLC formation service
Business license and permits
Employer Identification Number (EIN)
Initial legal and accounting fees
Equipment and supplies
Marketing and advertising
Establishing an LLC for your handyman business has several benefits, including easy maintenance, limited liability protection, and flexible taxation. The structure also protects your assets in case of lawsuits or defaults. This, plus the manageable costs, is why LLCs are a preferred business structure for many startup handyman companies.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
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