If you’re like most freelancers, you can’t imagine going back to a 9-to-5. Being your own boss is incredible — you decide your own schedule, you design your own workflow, and you choose your own projects.
However, with great freedom comes great responsibility. You’re running a one-person operation, and there’s a lot on your plate. One of the most important aspects of being a freelancer, and one of the most overlooked, is your personal liability. Even though you aren’t in a large organization, freelancers are still subject to the legal scrutiny and financial repercussions that big businesses often face.
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. If that feels like a raw deal (spoiler alert: it is!) or you've heard about LLCs, S Corps, and C Corps before and want to learn more about how they work, read on.
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:
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.
● 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.
● 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:
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 because you’re a member of Freelancers Union, you’ll get special savings off your business formation service costs when you rely on ZenBusiness!
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.