Are you that freelancer who loves working from their PJs? We hear you. You’re loving life as a freelancer and trying to see where the next best path is for you. LLC, no LLC for freelancers? We’re here to answer all of your pressing questions to see if establishing one is right for you!
First of all: who’s considered a freelancer?
A freelancer is a self-employed contractor that decides when and how they’ll perform work, runs their own businesses using their own materials, and typically works with multiple clients. Maybe you’re a freelance graphic designer, writer, or programmer. Either way, you’re likely offering either one-off or retainer-based services to businesses that are paying you via a 1099 form for any project that is more than $600. Sounds like you? Then you’re livin’ the freelance life. 🙌
What is an LLC, and is it required for freelancers?
An LLC is a limited liability company, which helps protect you (the business owner) from losing your personal assets (like your home or car) if someone were to sue your business. It’s a pretty popular way for freelancers to legally establish themselves, whether they’re a pet-sitting service, a voice-over artist, or an influencer.
An LLC isn’t required for freelancers, but it’s a great way to reap the benefits of tax advantages and protect your personal belongings if any legal action were to be taken against your business. One of the most loved tax benefits of LLCs is the write-off, which lets you “write off” business expenses like a home office, a new laptop to conduct business from, and even monthly business subscriptions, so you don’t have to pay taxes on them. Always discuss with a financial or tax specialist before considering your write-offs or conducting your taxes!
What are the benefits of starting an LLC as a freelancer?
We know— starting a freelance business can already come with lots of start-up expenses, and for some states, establishing an LLC takes a few hundred dollars to get started with (and a yearly fee). So what are the benefits of having an LLC for freelancers?
1. Limited liability protection.
Imagine you’re a freelance graphic designer and have gone back and forth with your client 20 times over on a design that they keep trying to tweak. At this point, you have to request more money from your client, as they’re taking up valuable time that’s preventing you from taking on other paid work. After telling them this, they’ve come to believe that you’ve taken their money without delivering your project, and they want to take legal action.
Hopefully, this never happens to you, but if it does, an LLC will likely make it more difficult for you to get sued if legal action were to be taken against you. Without an LLC, it could be a lot easier for them to sue you personally, which could mean you have to give up lots of assets to make up for it.
2. Flexibility in managing your business.
Many say that LLCs are the most “flexible” entity type. Why? Because it’s easy to change around management. Sure, an LLC has its own business laws that need to be followed, but managers and members can be changed around easily, by simply changing your operating agreement (which we’ll touch on below!). So if you feel like your brother’s contribution to your digital agency should be celebrated with a change of role, you can edit your operating agreement to reflect his newfound role. In a corporation, on the other hand, the board of directors is very strictly in place.
3. Securing financials is easier.
Say you’re looking to get a small business loan to invest in a new dual-screen desktop set-up so your freelance consulting business can be easier to run. Banks are way more likely to want to lend to freelancers who have a structured business over an individual. If you’re looking to take on a small business loan, on the other hand, then you’ll probably be required to be established as an LLC to even qualify for it.
How to Form an LLC
This all sounds great for your freelancing business, but how possible is it to actually form your LLC for a freelancer?
Take a look:
1. Choose a name for your LLC
Think of something that will grow with your business. If you’re currently a freelance muralist, but can see yourself getting into graphic design work in the future, try to encompass a name that will encapsulate as much of what you can see yourself doing as possible. If you can’t think of anything, you can always go for your name, knowing that if things change, you can change it or utilize a DBA or “doing business as” approach, as long as you have your LLC’s name written in the designated spots that your financial professional advises.
2. File your Articles of Organization
This is the actual process of filing your LLC. Go on your state’s Secretary of State website to find the link to file for your LLC and Articles of Organization. You’ll be asked to input info like your name, an address, and the purpose of your business, and to assign a registered agent to the state you’re in (if you’re not living in the same state you’re doing business in).
3. Obtain a Tax ID (EIN) Number
Some states will incorporate this into the Articles of Organization process, and others will require you to do it separately. Your EIN number will serve as an alternative to your Social Security number on tax forms and may be required for you to set up a business bank account or business credit card.
4. Open a business bank account
This isn’t required to form an LLC, but it’s highly recommended, especially when you start scaling your freelancing offerings, growing your clientele, and managing your finances with a professional lens.
5. Find a way to organize records and taxes
Using a financial planning app to track invoices and process payments will make organizing your finances worlds easier. Some common payment processors include Venmo Business, Paypal, and Stripe. It’s also essential to implement a reliable bookkeeping system.
LLC vs other types of business structures
As you can see, forming an LLC can be a great way to start as a freelancer! For comparison, here’s how they look against a few other popular freelancing business types:
LLC vs. Sole Proprietorships
A sole proprietorship is the simplest form of business; it’s when a freelancer is the only owner of a business but hasn’t set it up as any entity. A sole prop doesn’t separate your personal and business assets, whereas an LLC does. Many freelancers will remain sole proprietors if they don’t want to pay the cost of establishing an LLC, which typically comes out to a few hundred dollars to set up and in some states, an annual fee.
LLC vs. Partnership
A partnership can be as simple as a verbal agreement saying, “we’re business partners now!”, though it’s always recommended to get any business decisions down in writing. During the partnership process, you’ll have to file to register your partnership name with the state. LLCs work with tax write-offs and separate the business’s risks and benefits from the owners’, while a partnership’s taxes are more complicated and don’t separate the business’s risks and benefits from the owners’. Corporations also offer the same protection from personality liability as an LLC, but require more paperwork and might be subject to additional taxes.
Are you ready to set up your freelancing business as an LLC? 💸
Every business owner is different, the choice ultimately lies in your hands! While the decision can be tricky, you don’t have to go at it alone. Chat with our team of financial professionals so we can help you determine if an LLC is right for your business. Happy freelancing!
Can a freelancer own an LLC?
Yes, they absolutely can! It all starts with setting up your LLC, which can be done on your state’s Secretary of State website or with an all-encompassing business formation company like doola.
Is it better to be a 1099 or LLC?
A 1099 is a tax form that’s given to any independent contractor who’s completed over $600 in work for a given business. You’ll receive this form— whether or not you have an LLC— as an independent contractor. An LLC owner will also get this form, as long as they’re not taxed as an S Corps.
How do I pay myself as a freelancer LLC?
At the beginning of your freelancing journey, paying yourself is as simple as collecting payments through a processor like Paypal, Square, or Venmo for Business. Though it’s not required, it’s always best to set up a business bank account as soon as your form your LLC so you can separate your business income and expenses from your personal ones.
Should a freelancer form an LLC or S Corp?
Many business owners start with an LLC and then work with a financial professional to figure out if or when they should file as an S Corp. It’s best to consult a financial professional, as it depends on the state you’re in, the income or salary you’re making, or if you qualify for FEIE.
Is an LLC worth it for tax purposes?
When you approach your business finances strategically, an LLC can be very worth it for taking advantage of tax write-offs on business-related purchases.
What is the tax rate for LLC?
The current self-employment tax rate in 2023 is 15.3%.