As a freelancer, you may have considered starting your own business to take your career to the next level. One of the most important decisions you'll make is choosing the right legal structure. A Limited Liability Company (LLC) is a popular option, and for good reason. If you're operating your freelance business as a sole proprietor — you'll know you are if you receive payments under your SSN — you're the only one in the spotlight when things go wrong.
That’s why we are partnered with ZenBusiness - they’re a PBC (Public Benefit Corporation), which means giving back to small businesses is written into their bylaws. ZenBusiness’ all-in-one platform lets you form your business online and offers helpful solutions and resources that help small businesses. Basically, ZenBusiness lets you focus on your work without having to worry about keeping up with state filings and renewals for your LLC.
In this article, we'll explore the benefits of an LLC for freelancers, including how to create one, how it protects them, and the business cost savings it provides. We'll also take a closer look at recent legislation in California, specifically AB5, and how it affects self-employed individuals.
What is an LLC?
First, let's define what an LLC is. An LLC is a legal entity that offers personal liability protection to its owners, known as “members”. This means the member's personal assets are separate from the business assets. If the business is sued or owes debts, the member's assets are not at risk.
Creating an LLC
To create an LLC, you'll need to follow a few simple steps. First, choose a name for your business and make sure it's not already in use. Then, file Articles of Organization with your state's Secretary of State. This document outlines the basic details of your business, such as the name and address of your LLC and the names of the members.
Once your Articles of Organization are approved, you'll need to create an Operating Agreement. This document outlines the ownership and management structure of your LLC, as well as the rules and regulations that govern your business. While an Operating Agreement is not required in all states, it's a good idea to have one in place to avoid potential conflicts among members in the future.
The personal liability protection offered by an LLC is one of its most significant benefits. As a self-employed individual, you may be held liable for any mistakes or accidents that occur while you're working. If you operate as a sole proprietorship or partnership, your personal assets are at risk if you're sued. However, if you form an LLC, your personal assets are protected.
Consider a personal trainer who is operating as a sole proprietor. If a client is injured during a training session, they could sue the trainer for medical expenses and other damages. The financial and legal impact on the personal trainer would be severe for two reasons: First, while the amount of money might not hurt a large corporation much, the average personal trainer is likely to take a big hit. And second, personal assets are potentially on the line for sole proprietors or standalone individuals.
In addition, an LLC can also protect your business assets. If you’re not operating under an LLC and you lose a lawsuit, everything from your personal checking account to your home could be fair game - If your LLC is sued, only the business assets are at risk. This protection is essential, especially if your business involves a high level of risk, such as providing professional services or producing and selling products.
Creating an LLC can also result in significant cost savings for your business. For example, an LLC can help you save money on taxes. Unlike a corporation, which pays taxes on its profits, an LLC is a pass-through entity. This means that the profits and losses of the business are passed through to the members, who report them on their personal tax returns. This can result in lower taxes for the business and its members.
An LLC can also help you save money on business expenses. For example, you can deduct certain expenses, such as office rent, equipment, and supplies, from your business income. This can result in a lower taxable income for your business and reduce your overall tax burden.
AB5 and Self-Employed Individuals
Recently, California passed AB5, a bill that affects the employment status of independent contractors. Under AB5, workers are considered employees if they meet certain criteria, such as if they perform work that is within the usual course of the hiring entity's business. This means that many independent contractors may be reclassified as employees, which can result in significant changes to their working conditions and benefits.
However, AB5 includes exemptions for certain types of businesses, including those that operate as an LLC. If you're a self-employed individual who operates as an LLC, you may be exempt from the provisions of AB5. This can provide additional protection for your business and help you avoid potentially costly changes
In conclusion, creating an LLC is an essential step for self-employed individuals who want to protect their personal assets, save on taxes, and reduce their overall business costs. It can provide valuable liability protection and give you greater peace of mind while running your business. With recent legislation like AB5, it's more important than ever for self-employed individuals to consider forming an LLC to protect their business and their livelihood. If you're considering starting your own business or are already self-employed, consider forming an LLC and consult with a qualified attorney or accountant to ensure that you're making the best decision for your unique situation.
To get the benefits of an LLC classification without the headaches of wading through legalese, scrambling for deadlines, and risking non-compliance, ZenBusiness offers turnkey business formation plans with different options to meet your individual needs.
Basically, ZenBusiness makes the process super easy and convenient. You can do it all online without all the tedious paperwork, but with all the protections and legal knowledge you’ll need. Click to learn more and access a Freelancers Union member-exclusive discount, with LLC packages beginning at $0 plus state fees.