So, you’ve decided to be a freelancer. Exciting times are ahead, but you’ll need to make a critical business decision: whether to form a limited liability company (LLC).
Protecting your brand is crucial. Knowing how to register your freelance business as an LLC can help protect yourself financially and legally.
You might ask, “Can I LLC myself?” Yes. Let’s discuss what an LLC is, how to register as one, what benefits it provides and what requirements must be met.
What Is an LLC?
Aside from sole proprietorships, an LLC is a popular business structure. They are legal entities formed and governed at the state level.
An important legal distinction to note: When you create an LLC, you’re no longer considered the owner of the business, but rather a member of the LLC. Simply put, an LLC is a company that’s legally separated from its member (or members).
Types of LLCs
When forming an LLC, you have some options. Seek professional advice to help you determine which LLC suits you best. The most common ones are:
- You’re the sole member of the company and you receive the benefits of limited liability protection. You can decide to be taxed either as a sole proprietor or as a corporation.
- This is the typical LLC option in which there are numerous members who can choose whether they’re taxed as a partnership or as a corporation.
- This is a more recent option, in which a company has a primary LLC and then creates series LLCs under that umbrella. It’s an ideal choice for businesses with different purposes, assets or members.
Self-Employed: LLC or S Corp?
As a freelancer, you may wonder whether an S corporation is the better option for your business. Before you make that decision, understand the differences between an LLC and an S Corp.
The Crucial Difference Between LLC and S Corp
An LLC is a kind of business structure. An S Corp isn’t. Rather, it’s a tax election.
While there are similarities between LLCs and S Corps such as pass-through taxation, separate entities, and limited liability protection, there are significant differences.
For example, The Internal Revenue Service restricts the ownership of an S Corp to 100 shareholders and domestic corporations. There are more formalities with S Corp such as holding more meetings, keeping minutes for corporate records, adopting bylaws and issuing stock.
Be aware there are formalities with LLCs such as issuing an operating agreement and releasing membership shares, but there are fewer hoops to jump through than an S Corp when it comes to setup and maintenance.
What Are the Benefits of an LLC?
If you began freelancing without a formal business structure set in place, the government can treat your business as an extension of yourself. This means you’re fully responsible for filing and paying your freelance business taxes as part of your personal tax return.
It also means your personal assets are more at risk if you encounter legal issues, including personal and jointly owned assets:
- Real estate
An LLC adds some protection between any potential business liabilities and your personal assets. In most cases, members of an LLC aren’t held personally responsible for any debts or legal responsibilities the business incurs.
LLCs generally offer the same level of protection for your business as more typical corporate models, but they require less setup and maintenance. Another benefit? Avoiding double taxation. Because an LLC isn’t a separate taxpayer, it doesn’t pay dividends. The rare exception to this is if an LLC chooses to be treated as a corporation for federal income tax reasons.
How Do I Register as an LLC?
Forming an LLC in the U.S. is relatively easy, especially compared with other options. In most states, you can file the required documents and pay a filing fee online. Each state is different, so make sure you look up the requirements for your state.
There are several things you should do as soon as you set up an LLC:
1. Get an EIN
An employer identification number (EIN) is essential even if you don’t intend on hiring employees. Why? Using your EIN on W-9s and other forms help to keep your Social Security number confidential from clients and vendors.
2. Set up a Business Bank Account
Keep personal finances out of the mix. A business bank account helps protect you if a claim is made against your company. Many banks require people to set up an entirely new account for their LLC.
3. Secure Insurance
Because your LLC is a separate legal entity, it’s best to get insurance coverage in your LLC’s name. This remains the case even if you already have insurance as a freelancer.
Other LLC Considerations
Get a Business License
Whether you need a license depends on what type or size of business you’re running and where you’re located — not whether you’re an LLC. A license may be required to meet certain tax and legal requirements. Check with your state government. Business licenses are updated annually. Be aware that as your business changes, you may need to update your license as well.
Update your Operating Agreement
An operating agreement is a document laying out how your LLC is governed among its members. It also details how funds are distributed and contributed. This needs to be reviewed annually to remain valid.
Although an operating agreement isn’t always required for an LLC, having one creates another layer of protection for your personal assets. Even if you’re the sole member of the LLC, having this agreement is a good idea for tax and liability purposes.