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LLC for Freelancers
As freelancers, you enjoy the freedom of earning money on your own time. You can offer your services, whatever they may be, to clients at your own convenience. You aren’t tied down by the daily 9 to 5 and don’t have bosses or supervisors to report to. You are your own boss.
Despite all these perks, however, freelancers face many risks that come with the job. For example, there are times when customers are hard to find, especially in this current landscape where there’s a lot of competition offering the same services. Worse, freelancers who get sued for whatever reason related to their services could lose more than just their reputation—they could lose personal assets like their own home in order to settle penalties and debt.
If you’re a freelancer who wants to keep offering services at your own convenience but still be able to avail of the protection most companies enjoy, you should start your own LLC. In fact, let’s talk more about why it’s a good thing for you.
Definition
What Is An LLC?
Before moving forward to actually working on your freelancer LLC, let’s discuss what it is first. LLC, which stands for limited liability company, is a type of business structure that provides owners, called members, with personal asset protection. This means that in the event that your business goes under the scrutiny of the court of law, you will never have to pay for any damages using your own money.
Unlike corporations or partnerships, LLCs can be owned by a single person. This setup, called a single-member LLC, still provides that sole member with the same asset protection given to LLCs with up to 100 members. For this reason, a ton of freelancers in the country have formed their own LLCs—and you should as well.
Advantages
What Are The Advantages of A Freelance LLC?
Asset protection isn’t the only benefit of having your own freelance LLC. Here’s a quick look at the advantages LLCs can give to you.
Increased credibility and trust
LLCs are separate legal entities recognized by your state. As an LLC, you enjoy an immediate boost in your credibility. After all, you now offer your services as a company and not just as a skilled individual. This credibility might help you land bigger contracts and jobs than you ever had before.
In fact, with the proper connections, you can get big-time clients like government organizations and other groups requiring contractors with an established business entity.
A separate bank account
Freelancer LLCs are allowed to open bank accounts for business purposes. This allows you to separate your personal finances from what you get from the business, helping you keep track of your company’s funds, as well as yours, better. You can also take out loans from the bank and be approved for them faster if your LLC needs it.
Your LLC can legally pursue others
As a separate legal entity, your LLC can sue customers who are legally indebted to it for some reason (such as unpaid services). The plaintiff in such a case will be your LLC, not you.
Better offers in the future
As your LLC continues to do business with positive results, you will be able to build a credit history that will allow you to get business loans and credit products with better repayment plans and potentially lower interest rates. Suppliers might also give your LLC better deals, such as lower prices.
You can hire workers to work for you
With an EIN, which is one of the things you can apply for when you form your LLC, you will be able to hire workers in the event that you need more hands and minds to work on some tasks. This will allow you to take on bigger projects that you could never handle before as an individual freelancer.
Your own branding
As you establish your own freelance LLC, you will be able to establish your own brand. Your LLC will act as an umbrella (like how “Google” is an umbrella), giving you and the workers you hire a unified and professional appearance. Since LLCs are registered businesses, you can also add yours to Google for Businesses to appear on search engines.
Potential savings come tax time
LLCs offer a lot of flexibility in terms of taxation, allowing you to save a lot of money in some situations. You even avoid double taxation unless you elect to have your LLC taxed as a corporation.
Disadvantages
What Are The Disadvantages of A Freelance LLC?
All that said, freelance LLCs do have their disadvantages as well. While these aren’t serious enough to be considered a deal-breaker, it will be worth learning about them to prevent them from happening.
More paperwork compared to a sole proprietorship
Compared to a sole proprietorship, LLCs require you to conduct more documentation and reporting so that you won’t be flagged by the IRS. Thankfully it’s not at the level corporations are mandated to do, so you won’t have to worry about shareholder meetings.
Tax confusion
LLC taxation can be a complicated matter. Any confusion arising from this could lead to potential problems in the future. However, unless your LLC is taxed as a corporation, the taxes you’ll have to file are pretty straightforward. We’ll discuss more of this below.
Filing can be difficult
While it’s not entirely difficult to file the documents necessary for the formation of your freelance LLC, the process can be tedious. This is especially true if you’re a freelancer who juggles many tasks all at the same time. Fortunately, you can get experts to help you file your documents. You can even do it on your owner with a self-service platform like StartGlobal.
LLC Formation
How To Create A Freelance LLC
The benefits of having a freelance LLC outweigh the disadvantages, so we highly encourage you to start your own. If you’re confused about the process, here’s what you need to do to create your own LLC.
- Choose the services you want to offer
- Choose a name
- Get a registered agent
- File an Article of Organization
- Make an Operating Agreement
Choose the services you want to offer
As a business entity, you should clarify what kind of services you will be offering your clients. Don’t just say, “I’m going to offer IT services.” Will you accept contracts for website designs? Debug apps? Selecting the services you are going to offer helps you limit your load to what you can actually handle. You can just offer more services when you expand in the future!
Choose a name
Next, your freelance LLC should have a name that easily communicates what kind of services you’d like your clients to expect. It also has to be unique and not be in use by any other entity in your state. Make sure to check with your local Secretary of State’s office to verify if the name you plan to use is available. If it is, reserve it for when you actually form your LLC.
Get a registered agent
While you can form your LLC solo and file the necessary paperwork yourself, having to take care of this task—as well as the interactions between your business and your government—is time-consuming. That said, we highly recommend that you hire a registered agent for this purpose. Registered agents receive (and send) all legal documents on your company’s behalf. Their services will be valuable to you over time.
File an Article of Organization
Next, fill out an Article of Organization. This is a charter document used to establish your LLC’s existence in your state. This is a necessary step—unless this is done, your LLC will never be recognized by your government. Visit your Secretary of State’s website or office to secure a form, fill it up, then submit it along with the filing fee.
Make an Operating Agreement
An Operating Agreement works like an owner’s manual providing instructions on how your LLC works. Not all states require it, but creating one will help you give reminders to yourself, such as details on how you handle profits and losses and the workers you will hire in the future.
LLC Taxes
How Are Freelance LLCs Taxed?
LLC taxes can be quite confusing for those new to it, but it’s not impossible to learn the basics. Here are some key points to remember regarding taxes for your new freelance LLC:
Pass-through income tax
The IRS and your state’s Department of Revenue both treat LLCs as “disregarded entities.” This means any profit you receive from your business is considered pass-through income. By default, all your profits will only be taxed once, at the individual level or when you file your 1040 tax return. It’s usually filed once a year.
Self-employment taxes
Aside from the income tax, you will also need to pay your Medicare and Social Services contributions yourself personally. Called self-employment taxes, Medicare and Social Services are usually shared between employers and employees in a traditional employment setup. However, since you’re self-employed, you need to pay for the full contribution.
Sales taxes
Depending on your state and the services you offer, you’re required to file your sales taxes. In general, tangible goods such as physical products are subject to sales tax. However, some states also impose sales tax on specific services, such as consulting, digital products, or professional services. To determine your sales tax obligations, consult your local tax laws.
Franchise tax
Lastly, remember to pay franchise tax if your state requires it. This tax is like a business renewal or registration fee your state requires to keep your LLC. Some states impose a flat fee, while others calculate franchise tax based on your income or assets. Check with your local Secretary if they require this.
Costs
What Are The Costs Of Starting A Freelance LLC?
Here’s what you need to spend in order to get your freelance LLC up and running in your state:
Filing Fees
Filing the necessary documents with your Secretary of State’s office will cost you about $50 to $800, depending on the state where your company is going to be registered. For example, some states have lower filing fees, while others may have higher fees, particularly for expedited or same-day processing. To avoid potential errors in details and late submissions, we recommend hiring experts offering filing services.
Registered Agent Fees
Since the registered agent you’ll hire for your LLC provides important service, it’s only right that they get compensated for it. Some registered agents also offer additional services, such as online document storage, compliance reminders, or assistance with filing annual reports, which may affect the overall cost. Prepare to pay about $100 to $300 for their work.
Publication
If your state requires it, you might also need to spend on publishing notices about your freelance LLC in local newspapers. Some states may require the publication of the LLC formation notice for a specific duration, such as a few weeks or a certain number of consecutive publications. The rates charged by newspapers can differ by a margin, so it’s good practice to contact several local newspapers and inquire about their rates. By doing so, you can compare the costs and choose the option that best fits your budget.
Operating expenses
This one refers to your day-to-day expenses while running your freelance LLC. The amount you need actually depends on the services you offer, but for the basics, you will need to spend on the following:
- Rent for your office space or shop, or renovation funds to create such a space, if you set up shop at home
- The tools or equipment you use for work, for example, laptops/computers if you do video or graphics editing
- The consumables to need to keep rendering services to your clients; if you offer parcel delivery services, for example, this includes the packaging materials such as boxes, bags, and tapes
- Transportation costs and other overhead costs are necessary to keep the business running
Starting your own Limited Liability Company is your first step to receiving legal asset protection while enjoying your freedom to do business at any time you prefer to work. While the process of forming an LLC requires careful consideration and adherence to legal requirements, the rewards of legal asset protection, flexibility, credibility, and potential tax advantages make it a worthwhile endeavor for many freelancers. Get started with your LLC formation with us at StartGlobal today.
Comparisons
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