Whether you are providing rides, delivering meals, gigging as a freelance writer, or working on a side hustle, there are laws to consider when you’re operating a small business on a freelance basis. This guide takes a look at freelance work and offers insight on why taking your freelance business under the wings of an LLC is a necessary step.
To begin with, forming an LLC does not involve a lot of legal fuss and is a very simple and cheaper option to register your business. On top of that, the structure of an LLC does not involve a lot of maintenance and comes with a variety of benefits. Taking your freelance work under an LLC is an option that will benefit you in various ways and will protect it from legal jaws.
HOW CAN YOU REGISTER YOUR FREELANCE UNDER THE LLC?
Registering an LLC is quite simple and does not take a lot of time or money. However, if you are new to the game, some legalese can take the better of you. So, it is always recommended to have your LLC registration process done by experts.
However, if you have decided that you would do it yourself, you would have to start with filing the articles of organization of your LLC with the office of the secretary of the state and forming an operating agreement that outlines how your limited liability company will operate.
Articles of organization register your business with the secretary of the state, while the operating agreement is more of an inside document that is designed to decide the ways your LLC will operate. While both of these documents are vital, articles of organization are a legal necessity in every state to form an LLC, and an operating agreement is an optional agreement, but one that is highly recommended.
Once you have registered your LLC by filing the articles of the organization, and they are approved, your LLC is officially off and running. Now you can undertake all your freelance deals under the umbrella of freelance and can enjoy a plethora of benefits.
ADVANTAGES OF UNDERTAKING FREELANCE ACTIVITIES UNDER AN LLC
If you work as an independent contractor or freelancer, you receive form 1099 from your clients, and your taxes are not automatically deducted because you are primarily working under a sole proprietorship. When it comes to taxes, your social security number serves as your tax ID. But, here comes the most important question – is this the right approach towards getting taxes, or an LLC would suit you better?
To begin with, as a sole proprietor, you do not have any flexibility in taxation. You would be taxed under a regular taxation net, and there is no way you can avoid it. However, with an LLC, you get a lot of flexibility – as you get to choose how you want to be taxed.
- TAX ADVANTAGE
If properly managed, working your freelance activities under an LLC could help you in reducing a lot of your tax obligations. Furthermore, having an LLC for your freelance would also give you access to a number of tax benefits that are not available to non-business filers.
With the taxation flexibility that an LLC offers, you can combine different available benefits to structure an LLC system that suits your LLC needs. Going back to the time of filing your articles of organization, you will get a chance to choose either corporate taxation for your LLC or pass-through taxation (freelance taxes “pass-through” to your personal tax return).
From the provided options, if you choose pass-through taxation for your freelance LLC, your earnings (typically all the income garnered by you as a freelancer) will be taxed as if you were working under a partnership. Since LLCs can mix and match tax structures, you can choose to be taxed as either a partnership or corporation. Depending on other factors, this can save you a lot in taxation.
However, LLCs and taxes do not always come easy to most people, so it is always recommended to get professionals’ help when you plan to set an LLC for your freelance to maximize the tax advantages.
- ASSET AND LIABILITY PROTECTION
It is one of the major advantages of forming an LLC, though it could be less significant when it comes to working as a freelance service provider. However, even for a freelance service provider, without the limited liability protection, financial and legal troubles stemming from your freelance work could expose you to certain personal liability and leave you exposed and vulnerable.
With asset and liability protection, your personal assets will not be exposed to any claims if you are working your freelance gigs under the LLC – unless you’re involved in any business that is barred by law. Hence, it is a great opportunity to be availed for freelancers if they feel like they have their assets at stake.
- ADVANTAGE OF HAVING A BUSINESS BANK ACCOUNT
One of the underrated advantages of having an LLC for your freelance activities is having a separate business bank account. A business bank account for your LLC separate from your personal account is an amazing way to prevent your personal and LLC assets from commingling.
When you have separate business and personal accounts, you are better able to handle all the expenses and revenue from your freelancing gigs.
It is also a great help when it comes to tax filing. Also, depending on the nature of your freelance work, LLC’s business bank account may be in a position to provide more flexibility than your personal account. For example, personal checking accounts don’t give a lot of flexibility on the size and frequency of transactions, which business accounts do offer.
- INTANGIBLE BENEFITS
So far, we have looked at the tangible advantages of LLC for your freelance business, but there is a lot more to LLCs than what meets the eye. For your freelance work, having an LLC provides you with many intangible benefits, like the branding of your business and credibility.
As an independent contractor, your clients would always have your credibility in their eyes. When you are working as a freelancer under an LLC, your clients will not be worried about your credibility since the LLC itself shows that you have a structured business and are registered under all the state laws.
Similarly, it can also help you if you ever have to apply for loans from banks. As a freelancer and an independent contractor, banks would be very reluctant to lend you. But when you apply for a loan as an LLC, banks would have a lot of their doubts cleared, and you would have a greater chance of success of your loan application.
These are some of the biggest factors that every freelancer should consider, and it is obvious that carrying the freelance practices under an LLC is way more organized, safe, and less expensive. However, every freelancer knows that proper preparation and precise planning are the keys to success. If you are a contract worker or a freelancer, these are some really good reasons for you to turn your freelancing and contract operations into an LLC. But, as it is always recommended, look before you leap so that you make the right choice that suits you and that enables you to get the most out of your hard work.
Frequently Asked Questions
This section contains some of the most frequently asked questions about freelance work and LLCs, and we have tried to answer all of the possible questions that could come into your mind regarding LLCs and freelance work:
- Is a freelancer a sole proprietorship?
A sole proprietorship for any kind of business is the default business entity under the laws of the United States. This also means that if you are working as a freelancer without forming a corporation or an LLC, you’ll automatically be operating as a sole proprietor.
- Do freelancers need an EIN?
It is not a legal requirement, but freelancers can have a great help of an EIN to minimize their business risk. It is because federal tax law requires individuals and businesses who work with free freelancers to file tax form 1099 on annual earnings that exceed $600. For that, freelancers need to provide their social security number like an EIN, but if they are registered as an LLC, they would be able to provide a proper EIN.
- How do I get a tax ID number for a freelancer?
For this purpose, the W-9 form, which is also known as “Request for Taxpayer Identification Number and Certification”, provides your employer with all the info that is required to send you a 1099 form, which is then used to report your income to the IRS.