The Freelancer's Guide to LLC Formation

Here’s an example of what can happen to freelancers who operate outside of an entity (such as an LLC, S corp, or C corp):

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.

That’s right: In the event that you lose a lawsuit, everything from your personal checking account to your home could be fair game.

Your business classification affects more than just how you file your taxes. Many freelancers provide services under their personal name and operate outside of a legal entity. This is also known as sole proprietorship. However, individual freelancers can choose to operate as a company — usually, as an LLC.

LLC stands for limited liability company. The name says it all: an LLC is its own legal entity and is absolutely critical to separating an individual’s personal assets from their business debts and other liabilities.

This separation better safeguards those assets in the event damages are sought against them by a client or other party. You can think of LLC status as a barrier that helps protect your house, car, and other valuable possessions in the event a lawsuit is ever filed against you as a freelancer.

The benefits of operating as an LLC go beyond personal asset protection:

• Forming an LLC gives you greater credibility and professionalism. Your clients, especially larger corporate clients, will feel more comfortable working with an established LLC. Your business classification is shown through documents, contracts, and invoices with your clients (and now often your domain name, your website, your logo, etc., that can make you seem as legit as a bigger company). Seeing that “LLC” can also help clients feel more confident working with you.
• Certain projects with more bureaucratic clients, such as government organizations, require contractors who have established their own business entity. This requirement can be met by operating as an LLC. These clients may also ask you to provide an Employer Identification Number (EIN), which is like a Social Security number for your business. In some cases, they may even ask for a Dun & Bradstreet D‑U‑N‑S Number that uniquely identifies your company (although this number isn’t specific solely to LLCs).
• LLC formation can help you save money at tax time, depending on your situation. For specific ways that you may be able to benefit, be sure to consult with your accountant or tax advisor.
• The LLC provides a clear delineation for your freelance operation’s finances. With a separate bank account and credit card for personal and business expenses, tracking monthly expenses is faster, easier, and more straightforward.
• As an LLC, you’ll begin to build a credit history for your business. This can help you get business credit products and loans with better interest rates and repayment plans. You may also find new opportunities with suppliers, which can lower your costs and improve your service.
• For large-scale projects, freelancers often work together as a team. An LLC provides an “umbrella brand” that offers the team a unified and established appearance. It also gives you the flexibility to split project revenue between your team internally, instead of relying on the client to distribute payment.

As you learn about forming an LLC, you’ll probably come across information about S corporations and C corporations, commonly referred to as S corps and C corps. An LLC can have an S corp or C corp status, which is a type of tax classification. Although single-member LLCs are, by default, taxed in the same way as a sole proprietorship, an LLC can also choose to be taxed as a C corporation. For some business owners, this may result in tax savings.

C corps pay corporate income taxes, whereas S corps are “pass-through” entities. This means the company’s earnings, losses, and deductions pass through to the individual owner (or owners). The benefits and drawbacks of S corp or C corp status vary from business to business, but the details and setup can be complicated. After you’ve taken the first step to form your LLC, a financial advisor or tax professional can help you determine which classification is best for your business.

As you decide whether you should incorporate as an LLC, here’s a quick list of the pros and cons.

The Pros of Forming an LLC:

● You can customize how the LLC is run in an operating agreement. This includes decisions like how profits are divided, what happens when a member leaves (if you share your LLC with someone else), and more.

● You have additional liability protection as the business owner (called “member” in an LLC) that further protects your personal assets, in addition to business liability insurance.

● You now have the flexibility to choose how you want your LLC to be taxed, so you can pick the most advantageous option for your particular situation.

● You don’t have to worry about double taxation (unless you choose to be taxed as a corporation).

● You can have a separate bank account and credit card to track all your business earnings and expenses easily.

● You earn more credibility with clients by providing services through a legally formed company instead of your personal name.

● It can help bring your subcontractor team together under one unified umbrella.

The Cons of Forming an LLC:

● Self-employment taxes may be more convenient because your business and personal expenses are separated with an LLC. But, when it comes to tax filings, there will be (at minimum) more schedules involved.

● LLC formation is not entirely necessary for people who don’t plan to freelance long-term. For example, it may not be worthwhile if you’re between traditional jobs and simply taking on extra projects in the interim. However, if you expect to supplement your traditional job long-term with freelance income, it might be a good idea to set up your LLC.

Every state has its own guidelines and requirements for LLC incorporation. You can learn more about them from your local secretary of state’s website, or in the ZenBusiness guide to LLC formation. If you’re not using a business formation service like ZenBusiness, you’ll want to read up on specific state laws before starting, including how to remain in good standing over time. In most cases, you can form an LLC in five steps:

1. Name your LLC. Choose a memorable, suitable name for your company. Check to make sure there are no other businesses with the same name and that the name is in compliance with state laws.
2. Choose a registered agent. An LLC is required to have a registered agent available in person to receive official state correspondence and legal notices. Using a registered agent service can make it easier to accept legal notices in person during regular business hours. This is especially helpful if you are a digital nomad or travel regularly for work.
3. File the Articles of Organization/Certificate of Formation. This is the step that makes your LLC official. You’ll need to submit forms and pay fees within specific deadlines, and file all required documents correctly. A business formation company like ZenBusiness can handle this for you.
4. Create an operating agreement. This extremely important document establishes the rules for operating your company. It also lends another layer of legitimacy to your freelance work. If you aren’t using a template, you’ll need to do some research to make sure you include all the right information.
5. Apply for an EIN. An EIN officially registers your business with the federal government. You’ll use it at tax time, when you open a business bank account, and more.

Although the benefits of forming an LLC are clear, many freelancers don’t have the time or patience to set it up themselves.

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... and now the starter package starts at $0 plus state fees!

Founded by a team of passionate entrepreneurs in 2015, ZenBusiness now helps over 150,000 LLCs in all 50 states, including about 50,000 freelancers and consultants — many of them Freelancers Union members!

ZenBusiness makes it easy to start, run, and grow your dream business. Along with their formation plans, ZenBusiness offers tools, guidance, and expertise to help you be the best boss you’ve ever had.

Have questions? The savvy and super-responsive team at ZenBusiness can help. Contact ZenBusinesstoday or check out their FAQs.