When starting as a freelancer, knowing what type of business entity to form can be challenging. Should you Form an LLC? Or are there other options available to you? This article will discuss the pros and cons of forming an LLC and give tips on making the best decision for your freelance business.
What is a Limited liability company (LLC)
A limited liability company is a legal entity that is separate from the business owner(s). This means the owners are not personally liable for the company’s debts or liabilities. An LLC is not a corporation or a sole proprietorship. The main difference between an LLC and a corporation is not a separate entity for tax purposes.
Do I need an LLC as a freelancer
No, you don’t have to form an LLC as a freelancer or independent contractor. However, there are some benefits to doing so. For example, an LLC can provide liability protection for your assets. Another advantage of forming an LLC is that it can help you establish your business as a separate entity, making it easier to get loans or business capital. Ultimately, whether or not to form an LLC is up to you and will depend on your specific needs.
Repercussions of not filling
If you decide against forming a business entity, you will be viewed as a sole proprietor (considering you work independently). If you have partners or work with anyone else, you will be considered a partnership. Both of these business types are great options if
Any of the following apply to you:
-You have a low-risk business
-Run a small business and don’t anticipate rapid growth
-Don’t have a lot of personal assets to protect
-Comfortable with the risks associated with not having an LLC
Keep in mind that as a sole proprietor or partnership, you and your business are considered one entity. Which means you’re personally liable for all debts and obligations incurred by the business. This includes any lawsuits that may be brought against the business.
Also, you should be aware of the fact that you may miss out on tax breaks and deductions that may have been available to you if you were filing business taxes rather than personal taxes. In addition to missing out on tax benefits and deductions, you will also be subject to self-employment taxes, which equates to 15.3% in total, with medicare and social security combined. However, This does not include your income tax rate, which can vary widely based on your total earnings.
Benefits of forming a limited liability company (LLC)
- Your information is more private
When you are a freelancer, your personal information is available to anyone who wants to look for it. However, forming an LLC can help you keep this information private. This is because the LLC is a separate legal entity from you. So, when people look up the LLC, they will only see information related to the LLC.
- You can open a business bank account.
While it’s technically possible to freelance without an LLC, it can be challenging to open a business bank account without one. This is because banks often require proof that your business is a legal entity when you try to open an account. In most cases, this means providing your business license or articles of organization. If you don’t have either of these, banks may require an EIN.
- You can establish business credit.
Another common reason to form an LLC is to establish business credit. And second, it can help you qualify for business-specific rewards programs, like cash back credit cards. You should also consider signing up for a business credit monitoring service, like Nav, which can help you track your progress.
- Corporate taxation benefits.
You will be taxed as a corporate entity, which means you may be eligible for certain tax deductions and benefits. For example, corporate tax rates are typically lower than personal tax rates, and you may be able to deduct certain business expenses on your corporate tax return.
You may also have the option to structure your LLC as an S corporation, potentially enabling you to bypass self-employment taxes on your freelancing income. To proceed, you’ll need to submit an IRS Form 2553. However, it’s crucial to understand that not all LLCs qualify for this tax treatment. Therefore, it’s advisable to consult with a tax advisor before making any decisions.
- Security of your assets
As a freelancer, your assets are at risk if you are sued or your business incurs debt. However, your personal assets will be protected from business debts and lawsuits if you form an LLC. This is because the LLC is a separate legal entity from you, which means that your assets cannot be used to pay off business debts.
- You will have more credibility with clients and vendors.
As a freelancer, gaining the trust of clients and vendors can pose challenges. This stems from the perception that they may not regard you as seriously as they would a traditional business. Nevertheless, forming an LLC can instantly enhance your credibility. By establishing an LLC, you project a more formal business image, thereby conveying a sense of professionalism and reliability as a freelancer.
How do I file for an LLC as a Freelancer
Filing for an LLC as a freelancer is a process that can vary slightly depending on the state in which you operate, but some key steps are generally the same no matter where you file.
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Formation process:
- Choose a name
- File your Articles of Organization
- Create an LLC Operating Agreement
- Obtain an Employer Identification Number (EIN)
- Register your LLC with the appropriate state agencies
The filing fee can also vary depending on the state but is typically around $100. Additionally, you may need to file an annual report and pay a yearly fee to keep your LLC in good standing.
For a more detailed explanation of how to file your taxes, check out our other article:
How to file your taxes as a freelancer
Key takeaways
As you can see, there are several reasons why you might want to form an LLC as a freelancer. However, it’s important to note that an LLC is not suitable for everyone. So, before making any decisions, be sure to speak with a lawyer or tax advisor to see forming is the best option for you and your business.
