How to Set Up Your LLC as a Freelancer

How to Set Up Your LLC as a Freelancer

Are you someone who freelances and enjoys working from home? We understand. You have a strong affinity for the freelance lifestyle and are currently exploring the most promising direction for your future. Wondering about the necessity of forming an LLC as a freelancer? We’re available to address all the important questions you have, in order to determine whether establishing an LLC aligns with your needs. Initially, let’s tackle these inquiries.

To start off: Who qualifies as a freelancer?

A freelancer is an independent contractor who makes decisions regarding when and how they execute their work. They operate their own businesses with their own resources and often collaborate with numerous clients. You might be a freelance graphic designer, writer, programmer, or engaged in any similar role. Regardless, if you provide one-time or retainer-based services to businesses that pay you more than $600 per project through a 1099 form, then you’re firmly rooted in the freelance world.

What’s an LLC, and is it obligatory for freelancers?

An LLC, short for limited liability company, serves as a shield for you (the business owner) against losing personal assets, like your home or car, in case of legal action against your business. It’s a widely adopted method for freelancers to formally establish their presence, whether they’re offering services like pet sitting, voice acting, or influencing.

While freelancers aren’t mandated to create an LLC, it presents an excellent avenue to capitalize on tax benefits and safeguard your personal belongings in the event of legal disputes involving your business. One of the most cherished tax advantages of LLCs is the “write-off” feature, allowing you to deduct business expenses such as a home office, a new laptop for work, and even monthly business subscriptions, thereby lowering your taxable income. However, it’s always prudent to consult financial or tax professionals before applying these deductions or proceeding with tax matters.

What are the merits of initiating an LLC as a freelancer?

We understand that embarking on a freelance journey entails its share of initial expenses. In some states, establishing an LLC involves an upfront investment and an annual fee. So, what makes having an LLC appealing for freelancers?

1. Limited liability protection.

Imagine you’re a freelance graphic designer engrossed in countless iterations with a client who keeps requesting tweaks to a design. At this juncture, you need to ask for additional compensation due to the time drain, hindering your ability to take on other paid work. Following this conversation, the client becomes convinced that they’ve paid you without receiving the project and considers legal action.

While we hope this never occurs, having an LLC could potentially make it more challenging for legal action to be taken against you. Without an LLC, it might be easier for them to pursue legal action against you personally, potentially leading to forfeiture of significant assets.

2. Business management flexibility.

Many contend that LLCs offer the utmost flexibility as an entity type. This flexibility extends to altering the management structure. Although LLCs have their own set of business regulations, making changes to managers and members is straightforward by adjusting your operating agreement (which we’ll discuss further below!). If you feel that your brother’s contributions to your digital agency warrant a role change, you can modify your operating agreement to reflect his new position. In contrast, corporations typically adhere to a more rigid board of directors structure.

3. Easier financial security.

Suppose you’re considering obtaining a small business loan to invest in equipment that will enhance your freelance consulting business, such as a dual-screen desktop setup. Financial institutions are generally more inclined to lend to freelancers who operate under a structured business entity as opposed to individual arrangements. If you’re pursuing a small business loan, being established as an LLC could potentially be a prerequisite for qualification.

How to Establish an LLC

The concept of forming an LLC for your freelance endeavor might sound enticing, but what steps are involved in actualizing it? Let’s delve into the process:

1. Select an LLC name.

Choose a name that can evolve alongside your business. If you’re presently a freelance muralist but envision diversifying into graphic design, opt for a name that encompasses your potential avenues. If you’re stumped for ideas, you can always use your own name, knowing that adjustments can be made later. Alternatively, you can utilize a “doing business as” (DBA) approach, provided your LLC’s name is correctly indicated where financial professionals advise.

2. File Articles of Organization.

This involves formally establishing your LLC. Visit your state’s Secretary of State website to access the required forms. You’ll need to furnish details like your name, address, business purpose, and assign a registered agent, particularly if your business operates in a state other than your residence.

3. Obtain a Tax ID (EIN) Number.

Certain states include this step within the Articles of Organization process, while others may require a separate application. An Employer Identification Number (EIN) serves as an alternative to your Social Security number for tax purposes and might be necessary for setting up a business bank account or obtaining a business credit card.

4. Open a business bank account.

Although not mandatory, having a dedicated business bank account is strongly recommended, especially as your freelancing activities expand. It streamlines the management of your finances, particularly when dealing with client payments and business expenditures.

5. Implement financial record-keeping and tax strategies.

Employing a financial planning app simplifies invoice tracking and payment processing. Common payment processors include Venmo Business, PayPal, and Stripe. Establishing a robust bookkeeping system is crucial as well.

LLC vs. Other Business Structures

As illustrated, forming an LLC can be an advantageous choice for freelancers. To provide a comparison, let’s explore how LLCs fare against other prevalent freelancing business structures:

LLC vs. Sole Proprietorships

A sole proprietorship is the most basic form of business, where a freelancer operates without a formal entity. In contrast, an LLC offers separation between personal and business assets, providing a safeguard for personal belongings. Many freelancers opt for sole proprietorships due to the lower setup costs, even though an LLC’s added protection may outweigh this consideration.

LLC vs. Partnership

Partnerships can be as informal as a verbal agreement that establishes a business partnership. However, it’s advisable to document any business decisions in writing. During the partnership formation, you’ll likely need to register your partnership name with the state. While LLCs enjoy tax write-offs and segregate business risks and benefits from owners, partnerships involve more intricate taxation without the same level of separation between business risks and owner liabilities. Corporations also offer liability protection similar to LLCs but entail more paperwork and might be subject to additional taxes.

Ready to Establish Your Freelancing Business as an LLC?

Every business owner’s circumstances are unique, so the decision ultimately rests in your hands. While the choice can be intricate, you don’t have to navigate it alone. Engage in a discussion with our team of financial professionals to determine whether an LLC aligns with your business aspirations. Best of luck in your freelancing endeavors!

Frequently Asked Questions (FAQs):