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What are the benefits of forming an LLC?
This is a post from a member of the Freelancers Union community. If you’re interested in sharing your expertise, your story, or some advice you think will help a fellow freelancer out, feel free to send your blog post to us here.
Like many freelancers, you probably began freelancing as a “side job” to make extra income in addition to your regular day job. Or, you started freelancing with the intention of it becoming your full-time job after you landed a few steady gigs.
The big day arrives: You accept your first full-time freelance gig or you accumulate enough clients to form a small business. You can quit your day job and finally make your own schedule. However, you’re not done establishing and growing yourself as a full-time freelancer.
Establishing yourself as a legal business entity is the next step in formalizing your freelance career. Obtaining an LLC for your business is one of the best ways to help your venture continue to grow and advance your professional standing among other companies. An LLC can offer you and your business legal, professional, and financial benefits.
Taking the time to research this now will save you money and even more time in the future.
To help you make the best decision for your freelance business, let’s define what an LLC is and what the benefits are.
Limited Liability Company (LLC)
LLC stands for Limited Liability Company; it’s its own unit and therefore separate from you. It combines the advantages of corporations, partnerships, and sole ownership. It comes with its own federal tax ID that works like a social security number.
An LLC is a flexible and simple way to structure your company while protecting you and your personal assets. This is especially helpful if your company is ever sued in the future. Individuals, including freelancers, or multiple people, such as partnerships or estates, can own an LLC. The owner or owners are called LLC “members” and control the LLC. They might also hire an attorney to help with the LLC.
Unlike other types of business entities, LLCs don’t conform to the same rules that corporations have to follow. With an LLC, you can choose how to distribute profits and losses to each of the members. Overall, LLCs offer you more freedom than a corporation, with the tax advantages of a partnership business. All in addition to presenting yourself as a credible company.
Here are a few benefits an LLC offers:
Protection for Your Assets
A freelancer is considered the sole proprietor of a business. This means, in the event that your business gets sued, you’re also held responsible. It puts your personal assets and money at risk.
Creating an LLC for yourself limits the accountability for you as an individual. This covers anything that happens during the development and lifespan of your business. If you have an LLC and a client sues, your personal assets are safe from the lawsuit.
An LLC gives you the option to customize your benefits to fit your needs. When you design your LLC, you will have two taxation options to choose from:
• Pass through taxation: In this plan, your freelance earnings will be taxed as if you’re in a partnership. This means your taxes are moved from you as a freelance business owner to your personal tax returns.
• Corporate taxation: “Double taxation” is another name for this type of taxation. For this tax arrangement, you pay taxes as a freelance business owner. In addition, you also pay personal taxes for any income you paid yourself as an LLC owner.
If you need it, you could be an owner of a business corporation and elect to be taxed as a partnership business.
Simple and Inexpensive
Paperwork and cost might deter you from making your freelance business more legitimate. Fortunately, setting up and keeping an LLC is easier than setting up a corporation. Creating your LLC is as simple as completing and submitting Articles of Organization to the state government. The fee for the application varies by state; however, it is typically small.
For an LLC business, you’re not required to appoint board officer positions, conduct yearly meetings, or document company goals, mission, and values. To maintain your LLC, you just need to meet your state’s requirements and taxation policies as well as the IRS regulations. Meticulous record-keeping is strongly recommended to keep your business and assets protected.
An LLC can give you more integrity than your competition. All your potential clients, workers, and collaborators are more likely to work with you since you've made a proper commitment to your profession.
No Location Requirements
Even if you do not live in the United States, you can still form an LLC. This gives you the freedom to build your freelance business anywhere in the world. For those of you living abroad, it’s recommended to register in Delaware. The state has the lowest taxes and fees to maintain your freelance business. It also has the most flexible business laws.
Is Forming an LLC Worthwhile?
You might be asking yourself: Is it a valuable use of my time to research and then apply for an LLC? As a beginning freelance writer, I am a ways off from establishing an LLC. However, I know other freelancers who have formed an LLC and are very happy with their decision. It helps them feel calm about their growing business and personal assets.
Remember, having an LLC helps your business status, protects your assets, and offers tax benefits.
PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE SPECIFIC CONTRACT ISSUES OR QUESTIONS, DISCUSS THEM WITH YOUR LEGAL ADVISOR.
Troy has been married for 27 years to his wife Shauna. They have six active children and they love to participate in many extracurricular activities including boating, flying, mountain biking, hunting, fishing, horseback riding, and adventure motorcycling (pretty much whatever will get them outside). Troy has a vast amount of experience in the following business sectors: medical, dental, manufacturing, retail, restaurants, construction, farming and ranching. He is a shareholder in Cook Martin Poulson, a Utah Accounting Firm.