Should I Start An LLC As A Freelancer?

Freelance work allows you to transform your hobby into a lucrative career. This unique work style offers the freedom and independence that traditional employment often lacks. However, it also comes with some responsibilities, including deciding whether to start a limited liability company (LLC). 

Although freelancers don’t need LLCs to work as independent contractors, they could greatly benefit from several advantages of LLCs. 

Below, we’ll explore why you should consider starting an LLC as a freelancer and how you can start one five easy steps. 

What is an LLC?

Before we dive into why freelancers should consider starting an LLC, let’s discuss what they are first. 

A limited liability company (LLC) is a business structure that combines the limited liability of a corporation with the flexible management of a sole proprietorship. It’s very popular among small business owners who want asset protection. 

Unlike sole proprietorships and partnerships, LLCs legally separate the owner from the company. 

Should I Form an LLC as a Freelancer?

Truthfully, you don’t need to form an LLC to do freelance work. However, there are several benefits to establishing one, such as:

Limited Liability Protections

Limited liability is one of the primary reasons why freelancers form LLCs. If you started freelancing without any business structure or entity in place, the law treats your freelance work as an extension of yourself. This means clients and creditors can personally sue if they want to. 

But when you establish an LLC, you clearly distinguish yourself from your work. Your business will have its own legal entity, and you’ll have yours. 

Let’s say a client thinks you didn’t deliver your project on time and wants to sue you. Since LLCs are their own legal entities, they can’t go after your assets and sue you personally. They will only be allowed to file a lawsuit against the LLC. 

Tax Flexibility

LLCs can change their tax election depending on their financial needs and goals. 

By default, the Internal Revenue Service (IRS) taxes LLCs as pass-through entities. Everything they earn and lose passes through to their owners, who must include them on their tax returns. However, they can change their tax status to an S-corp or a C-corp. 

Changing your tax classification will allow you to optimize your tax liabilities efficiently. 

Anonymity

If you establish an LLC for your freelance work, you can maintain anonymity and prevent your personal information from being exposed to the public. 

Freelancers typically operate under their own name, but this approach leaves them vulnerable to privacy breaches. Fortunately, some states, like Nevada, allow LLC owners to name their registered agents as the company’s organizers. 

This approach prevents their personal details from being part of public records. 

Credibility

Regardless of the nature of your freelance work, having a legal business entity like an LLC can help you build credibility among potential clients and partners. 

Forming and establishing a legal entity demonstrates a commitment to professionalism. It reassures your clients that they work with a legitimate and trustworthy freelancer. 

How to Form an LLC For Freelance Work

The process for forming an LLC varies from one state to another. But they typically include five steps:

Choose a Name

The first step in forming an LLC for freelance work is choosing a name. Choose a unique name that hasn’t been used by any other business in your state. Most states have a business name database you can check to ensure that your target name is free to use. 

We also suggest you check your state’s regulations for LLC names. Typically, your LLC’s name should end with one of the following designators:

• Limited liability company
• Limited company
• LLC
• LC
• Ltd. Liability Co. 

Find a Registered Agent

A registered agent is a person or company assigned to receive legal correspondence on behalf of your LLC. Anyone can be a registered agent if they have a physical address within the state where your LLC is registered. 

File Your Articles of Organization

Articles of organization are the primary document used to establish an LLC. Some states call it a Certificate of Formation” or “Certificate of Organization.”

Your articles should contain basic information about your LLC, such as:

• Name and address of your LLC.
• Name and address of your registered agent. 
• Names and addresses of the LLC members. 

In addition, you’ll have to pay a filing fee, which ranges from $35 to $500. Check your Secretary of State’s website to determine how much you must pay when you file your articles. 

Get Your Employer Identification Number (EIN)

Your LLC’s Employer Identification Number (EIN) is its tax ID. Consider it your Social Security number when you file your tax forms. An EIN typically does several business activities, like opening a business bank account and hiring employees. 

Open A Business Bank Account

Once you get your EIN, we highly recommend opening a business bank account. This will help you keep your business and personal finances separate. 

Keeping your business and personal finances is vital in preserving your limited liability. There have been instances where courts “pierced the corporate veil” or disregarded an LLC owner’s limited liability due to failure to maintain a clear separation between personal and business finances. 

By mixing both, you risk losing the protections of your LLC. 

When Should a Freelancer Form an LLC?

Truthfully, not every freelancer needs an LLC. Establishing an LLC may not be the best option if you only take on a few projects for your friends or loved ones. 

However, if you want to make freelancing your primary source of income, you’ll want to form one to maximize your tax savings. 

It’s worth noting that establishing an LLC is no easy feat. It requires careful consideration, so take some time to decide whether you want to form one for your freelance work. 

Launch Your Freelance LLC Today

Take your freelance gigs to the next level, and let NCH help you establish your own LLC. 

NCH’s business formation experts will guide you through the entire formation process, from filling out your articles organization to hiring an efficient registered agent. 

Schedule a free consultation with one of our business formation experts and contact us at 1-800-508-1729. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.