Freelancing gives unrivaled control over one’s time, the possibility to self-manage and better yet earn a living doing what one loves.
Nevertheless, with the growth of the freelance business comes the concern of whether forming an LLC should be a consideration. Enterprises LLC can give numerous benefits, but indeed it is not a blanket solution for every one of the problems freelance businesses face.
Let’s now analyze its respective advantages, and disadvantages and when it comes to freelancers it’s worth getting one.
What Is An LLC?
A Limited Liability company (LLC) is a form of business structure whereby the owners are legally protected from one another’s debts and any other liability that their business incurs. It brings together the vital aspects of ease of management typical of a sole proprietor and the limits of liability associated with a corporate structure.
On the part of the freelancers, LLC shall be able to provide a way to construct one’s business as a separate legal entity with added advantages of liability protection, tax shields, and even a good reputation.
Even though there are extra costs and obligations arising from the formation of an LLC, it does depend on one’s scenario, but the upside would be the added layer of protection and also the potential growth of a business.
Top Advantages of Forming an LLC for Freelancers
1. Limited Liability Protection
Of all the reasons given for forming an LLC, the number one the majority of freelancers give is to safeguard their or personal assets from any risk or liability that arises from their practice or business.
- Asset Protection: One of the primary benefits of registering an LLC is that your personal savings, house, and other assets are kept away from business obligations, legal actions, or other liabilities.
- Risk Evaluation: Freelancers who are required to sign contracts, work on projects with high stakes, or are in legal industries, such as design, consulting, or IT, still face personal financial exposure. To soothe this vulnerability, an LLC is recommended.
For example, if you are being sued by a client for breach of contract, the only asset at risk is the asset owned by an LLC. You cannot lose personal assets such as cars or bank accounts.
2. Enhanced Professional Image
- Business legitimacy: In consideration of the operating name of the business: (let’s say, Jane Doe Creative LLC), having an LLC registration makes the business sound more credible which may allow for better business prospects opportunities such as clients who are larger or corporate who are generally more interested in businesses than individuals.
- Brand Positioning: An LLC allows a freelancer business to be marketed and positioned as a distinct entity which allows for ease of growth for the brand.
3. Tax Advantages and Flexibility
Freelancers working in limited liability corporations do enjoy some tax benefits in this regard;
- Pass-Through Taxation: It is important to note that LLCs are classified as a pass-through entity meaning the company income is taxed once at the personal income level and not at the corporation level as in double taxation.
- LLC S-Corp Election: Freelancers with high revenue income can elect to have their LLC treated as an S-Corporation for tax purposes. This means that you can draw a salary and take the remaining profits in the form of distributions to save on self-employment taxes.
- Tax Deductions: LLC freelancers don’t face much of a challenge when it comes to tax deductions since the leased space for the office, internet expenses, the equipment needed as well as travel expenditures also qualify as business expenses so there is reduced taxation.
4. Convenience in Business Banking and Credit
- Financial Cutouts: LLC reduces the hassle of opening a business checking account and getting personal and business finances mixed up. This not only makes tax season easy, but it also shields your limited liability.
- Business Credit Accessibility: Business credit is harder to obtain than personal credit; LLCs provide business credit which would help obtain business loans, lines of credit, or vendor accounts more easily when wrapped in business credit.
5. Ability To Scale & Growth Potential
- Freedom to Expand: For freelancers who target to grow into agencies, hire staff, or partner with other parties, the LLC structure is commendable as it provides room for abruptly complex business needs.
- Ownership Flexibility: Unlike sole proprietorships where one individual owns the business and no partners, members or investors can be added, LLC consists of multiple members with the ease to add partners/investors.
Cons of Forming an LLC for Freelancers
Considering the benefits that the LLC would bring, it is inadequate for freelancers since there are hardships that such freelancers would have to deal with.
1. Cost of Formation and Maintenance
- Filing Fees: To formally establish an LLC, the possibility for acquiring resources is to the tune of about $50 to $500 which is also dependent on the state.
- Ongoing Costs: Most of the states have annual or biennial reports as well as fees which could be as low as $20 or in the hundreds. Other states like California require an additional franchise tax if a state LLC is established.
To freelancers who are just beginning or have not built up an impressive portfolio, these charges could easily outweigh the plus points that are brought about by forming an LLC.
2. Administrative Responsibilities
Forming an LLC calls for more legal paper works than just being a sole proprietorship:
- Filing articles of organization with the state.
- Executive members of the LLC have to have an operating agreement in place even if there is a single member.
- Creating comprehensive records of transactions.
- Preparing and submitting annual reports as well as payment of fees prescribed by law in the federal and the states.
These requirements although do not seem too complicated, do require time and focus which may require you to apply more effort away from your freelance activities.
3. Self-Employment Taxes
All of the members of an LLC are subject to self-employment taxes which are payment of social security and medicare taxes. Such taxes can cost a large part of the earnings, however, it is possible to elect an S-Corp status which can assist with a portion of these requirements for a freelancer who is at a high-income level.
Is forming an LLC the best decision for freelancers?
1. High Income Thresholds
Forming an LLC is an effective business structure for freelancers, especially those making significant income and earning $60,000 a year or more. This is because:
- Tax Advantages: As income goes up, the tax options afforded by an LLC become more enticing. For example, LLCs can be taxed as S-corporations, which means it can reduce self-employment taxes by allowing owners to pay themselves a salary and distribute the rest of the earnings as dividends.
- Protection of personal assets: A freelancer must make all the necessary provisions to ensure that their personal belongings are safeguarded. An LLC creates a liability shield so that finances and properties that are considered personal cannot be attached in the event of a litigation process that is associated with the business.
- Growth Potential: With higher revenue, you might reinvest in your business, hire contractors, or expand services. An LLC prepares you for a market that is constantly changing and subject to volatility.
For those freelancers who are currently earning less than the $60,000 mark but anticipate growth in the long term, LLC formation may be worthwhile despite low revenues at present.
2. Increased Risk Exposure
Freelancing work comes with great exposure to some legal and financial consequences, making it essential to set up a limited liability company. For example, the following:
- Client Contracts: The higher the amount and number of individual projects, the higher disagreements regarding deliverables, deadlines, or even quality that one may have due to elevated levels of signed contracts.
- Intellectual Property: Freelancers in disciplines such as design, writing, or even software development may have to contend with legal threats like copyright issues, and trademark or intellectual property disputes.
- Errors or Liability: Consultancy services, marketing, and also IT professionals can easily create financial or operational problems for clients and thus the risk of lawsuits is always present.
Such risks are covered by an LLC which takes away undue risks from the personal assets of the owner and rather limits them to the business only. For example, if a client decides to sue your LLC, the only thing that is at risk is the assets of the business only and not the individual himself/herself or his/her bank accounts.
3. Long-Term Business Goals
Once you start freelancing and plan to grow your business beyond a one-person band, the structure and expandability of an LLC will prove to be highly useful.
- Growing into an Agency: LLC is a useful legal vehicle for organizations where agencies intend to recruit employees, subcontractors, or a group because it facilitates the easy management of payroll, liabilities, and also benefits packages.
- Attracting Partnerships or Investors: As you expand, the need for partners or funding may arise. LLCs offer something positive in this respect as they enable easily securing equity or sharing of ownership.
- Adding New Locations: Increasing your services or going into new geographical markets normally calls for the need to plan your business properly, particularly in issues revolving around contracts, copyrights, and business loans.
The growth and expansion strategies undertaken by forming an LLC make competitive business entities and is well placed for the challenges ahead.
4. Engaging with Major Corporates
Freelancing to win contracts of corporations or government agencies may where this tendency lead to imposition of the working with a company in LLC or any other formal status.
- Professionals’ Needs: Many companies require the inclusion of LLCs in their vendor list, especially during lengthy contracts and high-valued projects.
- Greater Confidence: To offer services or perform work under the auspices of an LLC provides clients with confidence in the professionalism, legitimacy, and ability of the company to perform complex work.
For instance, a freelance graphic designer shifting into corporate clients may find that those willing for an MR for higher contracts will be llc because they will give access to formal agreements and liability.
5. Establishing a Brand and Professionalism
Freelancers who wish to develop their identities into brands would have a real interest in forming an LLC:
- Developed Brand Image: For instance, instead of marketing oneself as a person, brands evoke strong emotional channels, being called something such as “Creative Solutions LLC”, which can have more global outreach.
- Broader Clientele: Many people cite this reason for not persuading clients, they simply prefer brand names they know and trust.
- Trust Factors: With an LLC name brand- Clients are likely to be more trusting, which is sometimes the only deciding factor for many freelancers’ clients.
Also, freelancers who tend to work on an ad hoc basis but wish to take their profession seriously and transition that into a business will be able to project a strong commitment to potential clients.
When Might An LLC Not Be Worth It?
1. Either Low Income Always or Irregular Income
Freelancers who wish to take a break or have a part-time freelancing option should consider framing one or maintaining the LLC which will certainly be more beneficial.
2. Little to No Risk
A situation where work may have almost no financial risk exposure may make working as a sole proprietor quite sufficient.
3. Saving in future growth stages
The reverse procedure may sometimes prove to be a lifesaver, beginning operations as a sole proprietor and later transitioning as an LLC will enable someone to save quite a fortune at the early stages of operations.
How to Start a Freelancer Limited Liability Company
1. Select a Business Name
The next reasonable procedure is to choose an appropriate name that is unique and deletorily compliant with the law.
- State Laws: A business name must include a designation or phrase as in “LLC” or “L.L.C.” Most courts, on this point, are willing to broaden the scope of words used but only for one company so that all case restrictions are complied with. Further, certain terms including “bank” or “insurance,” may need special approval.
- Exclusivity: Do the key name test and verify if your selected name has already been registered with other entities offering business services identical to yours in your state in most of the cases through your state’s Secretary of State websites.
- Domain Names: Having a domain name that embodies your business will ensure that customers remember your product with ease. Notably, check whether the domain name that relates to the name of your business is available to create an enhanced brand reputation.
For some, the dilemma of not being ready to file their LLC application but trying to find a preferred name may be easy. If you have a business name you wish to use but are not prepared to apply for an LLC filing, you might want to reserve it for a while. Most registrars are willing to reserve a name for a small fee.
2. File the Articles of Organization
The Articles of Organization, sometimes called Certificate of Formation, is the document that provides the legal creation of your LLC.
- Where to File: The form can be filed with the office of the secretary of state of the state where the LLC will be formed, through the Internet or by mailing it.
- Information Required: The form generally contains the name, address, activities of the LLC and the registered agent information.
- Filing Fee: Filing fees vary from one state to the other, between $50 and $500. Other states may charge some additional recurrent fees or franchise fees.
After receiving the approval of the form, a certificate indicating the formation of the LLC will be granted to you. Maintain the document in your files because it is often needed for many beginning procedures.
3. Court a Registered Agent
A Registered Agent is a person or entity that has been appointed to receive service of legal documents on behalf of the LLC.
- Who Can Be a Registered Agent: You can act in that capacity appoint your friend or use any registered agent service provider. Such agents are required to have a physical street address within the state where the LLC was set up.
- Significance of Registered Agent: This person acts as the communication link for your LLC and ensures that your business receives important notifications like tax payments, lawsuits, or compliance alerts.
For individuals who may be worried about their privacy, employing a registered agent service can assist them in keeping their address off the public record.
4. Formulate an Operating Agreement
In simple terms, an Operating Agreement specifies the fundamentals of the internal regulations and procedures of the LLC. In negligence to what has been earlier stated, the formation of even this simple document should be observed even when the LLC has only one member.
Key Considerations:
- The management and structure of ownership, including the percentages that each owner holds.
- Management team members and their respective functions.
- Main decision-making processes.
- Rules concerning the addition or exclusion of existing members.
- Division of profit or loss.
Legal significance: It is not all the state where an Operating Agreement is a requirement, but it is helpful in conflict resolution, proves professionalism, and supports the limited liability characteristics of your LLC.
The Operating Agreement of single-member LLCs is more of a personal document. However, it becomes very useful when you have one or more partners or even investors in the business.
5. Get an EIN (Employer Identification Number)
Another number that is necessary for your LLC as well as for filing taxes is an Employer Identification Number (EIN). EIN is also referred to as a Federal Tax Identification Number and it is mainly provided by the IRS.
Reasons for acquiring an EIN:
- To facilitate obtaining a business checking account.
- For taxation purposes.
- Plans of employing workers in the future.
How to apply: There is a need to apply for an EIN via the IRS website which is relatively simple to do at no cost at all.
If you operate as a single-member LLC, even without employees, an EIN makes tax reporting easier and adds credibility to your business.
6. Business Bank Account Setup
To the tune of tax season, personal and business financial accounts are best kept separate to ensure the liability protection offered to the LLC is not breached.
What You Need: Most business bank accounts typically require the following:
- The EIN of your LLC.
- The Articles of Organization.
- Operating Agreement (not required, although suggested).
Benefits of separation:
- Keeps personal and business transactions separate for reporting purposes.
- It prevents owners from losing their LLC personal assets by switching business entities when required.
- It makes accounting and tax submission a much easier task.
Alternatively, if you want to build up your credit under the LLC’s name, consider getting a business credit account from the business account you created.
Conclusion
LLCs potentially have their advantages for freelancers, including personal asset protection and taxation advantages as well as improving their status in the eyes of clients. Most unmistakably, it is not essential, especially within the primary stages or those who are on a smaller scale. Do make a decision based on costs vs benefits vs your long-term perspective.
An LLC is a good option for freelancers who have an increase in their earnings, a high level of risk exposure, or strategic plans to expand. A legal practitioner or a tax consultant will be best suited to advise on the next course of action depending on your particular circumstances.
Do you require assistance with the process of setting up an LLC in your state or customized instructions specifically for freelancers? Book a free consultation with Easyfiling to form your LLC today.
Nabin Adhikari
