Do I Need an LLC to Freelance?

Should I Form an LLC for My Freelance Business?

Whether or not you should form an LLC depends on what will be best for you and your freelance business. Most freelancers don’t start off by forming an LLC because freelance businesses are not required to register with the state’s registration office. And forming an LLC isn’t necessarily the best choice for every kind of business—although LLCs have some significant advantages.

What happens if I don’t form an LLC?

If you choose to continue to freelance without forming a state-level entity like an LLC, you have what’s known as a sole proprietorship (assuming you’re operating solo). If you’re running your business with other people—then you have a partnership. These business types can be good if you:

• don’t have the money to spend on registering a business entity

• are just beginning to build your business and client base

• are working within a business model that has a relatively low liability risk

There are downsides, however. As sole proprietor or partner, you and your business are considered one and the same. Legally speaking, there is no difference between your personal assets and your business’s. This means that if your company is sued or goes bankrupt, you are personally responsible. Being a sole proprietorship or partnership may also make it difficult to raise outside funding for your business. Investors typically don’t want to take on personal liability with their investment.

You also don’t have any flexibility for how your business is taxed. For the income your business generates, you’ll pay self employment taxes on top of personal net income tax. While your income tax rate will vary depending on how much money you make, self-employment taxes are generally an extra 15.3%: 12.4% for Social Security and 2.9% for Medicare.

Benefits of Forming an LLC

Forming an LLC for your business offers you benefits and protections you don’t have with a sole proprietorship or partnership.

• You can better protect your personal and business assets.

  Once the state approves your LLC’s articles of organization, you’re legally separated from your business. Generally speaking, this means your personal assets are not vulnerable if your LLC is sued or audited. For example, if a freelance software developer is being sued by a client for breach of contract, their liability for the legal claim and any debts would be limited to the assets of their LLC, rather than personal assets, like their house or car. It also works the other way—if you’re personally sued, your freelancing business’s assets are generally protected.

• You can establish and build your company’s credit.

  After forming an LLC for your business, you’ll be able to build your company’s credit separate from your own. Building business credit is essential if you want to eventually avoid having to submit your personal credit history or put up personal guarantees for business loans or similar applications.

• You quickly establish your business’s credibility.

  Most freelancers are professionals who produce professional work, but the truth is that potential clients may be more likely to take pay for your services if you’re working under the name of a formal business entity. Just writing a check to an LLC feels more legitimate than writing one out to an individual owner or even a DBA name that lacks an identifier like “Limited” or “LLC.”

• Your personal information is kept more private.

  Without a formal business entity like an LLC, freelancers operate under their own name. With an LLC, business is done under the LLC’s name. And while the LLC’s information is publicly available to anyone willing to dig, it’s often possible to limit your personal information on these filings. By hiring a registered agent and business formation service, you can usually avoid listing your personal address—and sometimes even your name—on your public LLC records.

• You have multiple tax options.

  Unlike a sole proprietorship or partnership, an LLC has the option to change its tax classification. By default, single-member LLCs are taxed as disregarded entities (similar to sole proprietorships), and multi-member LLCs are taxed as partnerships. However, if the LLC meets requirements, they can also file paperwork with the IRS to be taxed as an S-corp or a C-corp, which opens up different possibilities for tax savings.

Remember: you don’t have to form an LLC to freelance. Sometimes sole proprietorships and partnerships work well without being turned into LLCs. But if you’re looking for a way to separate yourself from your business, build up your company’s credibility, keep your personal information private, and open up some tax options, forming an LLC for your freelance business may be a good option.