Note: This article contains legal advice. We recommend you consult a lawyer before making legal decisions in your business.
Freelancers often start out as struggling professionals. At the time, their natural habitat would include job boards and gig sites like Upwork and Fiverr. Their quest for work? Neverending.
But eventually, these tiny freelancing lions become the kings of their respective-industry jungle. They don’t have to bid for jobs anymore or pitch to clients. In fact, the roles are reversed. They have to start turning clients away because they don’t have the science to clone themselves.
At this point, freelancers have a decision to make: turn their operation into a full-fledged startup, or stay as they are now. But you’re probably tempted to stick to the course. After all, if your goal was to form a new business rather than attract more business, you would have done it already.
Right? Well, not quite. A lot of freelancers assume you have to staff employees to transition from a sole proprietorship to an LLC, but that’s not the case. You can have a freelance LLC as an individual!
But if that’s true, what other misunderstandings have you picked up along the way? Likely a lot, but we have you covered. Plus, we’ll show you how easy it is to get an LLC for freelancers.
What is an LLC for freelancers?
A freelancer LLC, with LLC standing for “limited liability company,” is a business structure that lets you separate your business assets from your personal assets. As a sole proprietor, your personal and business assets, including all debts, are classified as “personal,” no matter what.
To form an LLC, you have to file a document with your state’s business filing office. Fortunately, starting a freelance LLC requires the same steps whether you’re forming a real estate LLC or a stock photography company. If you decide to get an Employer Identification Number (EIN), you can build business credit, borrow funds, and hire workers under your LLCs business name.
Why freelancers should use an LLC
If you’re a freelancer or independent contractor, that means you haven’t formed an LLC. All freelancers are classified as sole proprietors by default. For tax purposes, you use your Social Security Number (SSN) as your tax ID, whereas LLCs may use their SSN or their own tax ID.
But the question is, what entity better fits your line of work, a sole proprietorship or an LLC?
That’s a matter of opinion. There are plenty of good reasons to form an LLC, whether you’re a new or experienced contractor, and we like to think the positives outweigh the negatives.
Here are 8 reasons why a sole proprietor would want an LLC for freelancers:
- Freelancer LLCs can choose to be taxed as a sole proprietor, S Corp, or C Corp, which offers freelancers a great deal of flexibility in costs and possible tax benefits.
- The owners of an LLC are protected from some or all liability for any debt built by the LLC. If the freelancer chooses to go bankrupt, only their business credit is affected.
- LLCs have less paperwork or record-keeping to worry about compared to a corporation.
- Freelancers benefit from pass-through taxation, meaning they won’t be taxed twice.
- With default tax classification, profits are taxed personally at the member level.
- Freelancers appear more professional to clients when they register as LLCs.
- Some freelancers have access to business credit (if they have an EIN).
- With an EIN, freelancers can hire employees if they want to expand their business.
There are also several benefits available to multi-member LLCs not afforded to single-member LLCs, but you should only form a multi-member LLC if you plan to scale or hire employees.
Do I need an LLC to freelance?
No, you don’t need an LLC to freelance; for some, starting an LLC may not be worth it.
While creating an LLC has benefits, we also want to be fair and balanced. Forming an LLC isn’t for everyone, and if you jump in without thinking, you may find it difficult to stay afloat.
Here are 5 reasons why you wouldn’t want an LLC for freelancers:
- Raising capital for an LLC could be hard as investors trust corporations more.
- Some jurisdictions level a franchise or capital values tax on LLCs.
- Renewal fees are higher in some jurisdictions, such as Maryland.
- Taxing jurisdictions outside of the US classify LLCs as a corporation. If you plan to do business outside the US, you may be taxed differently, so be careful!
- Running an LLC is slightly more complicated than running a sole proprietorship. Freelancers may need professional help to maintain their records or file taxes.
Although forming an LLC can cost more in some states, that shouldn’t be enough to deter you. As for the other negatives on our list, most of these can be minimized (or ignored entirely) if you prepare ahead of time and maintain your records. If you do it right, an LLC should benefit you.
How to get an LLC for freelancers
Getting an LLC for freelancers is pretty straightforward, but getting lost in all that legal speak is easy.
Select your preferred freelance LLC
An LLC for freelancers falls into three umbrellas: single-member LLC, domestic LLC, and foreign LLC. A single-member LLC can be domestic or foreign-based on where it’s formed.
For example, if you wanted to start an LLC in Florida from scratch, your LLC is a domestic LLC under tax law. If you already have an LLC and you want to operate out of Florida, you can register your current single-member LLC there, but you’re considered a foreign LLC by tax law.
You can operate your LLC anywhere in the states, but you must pay your taxes in the state where your business was formed. If you want to take advantage of another state’s tax law, you can leave one state and register in another, but only if you’re classified as a full-time freelancer.
You can simplify your LLC registration with services from ZenBusiness, Collective or LegalZoom.
Pick an interesting business name
You need a business name to register a freelance LLC. The name you choose for your LLC has to be unique and can’t be trademarked by another business. If you want to know which names are already taken, check out the U.S. Patent and Trademark Office online database. You should also understand how LLCs and trademarks are different.
The perfect business name will include what you do and accommodate your potential growth.
For example, a copywriter could call their business “ZZZ Copywriting Services LLC.” In that “ZZZ” part, try not to include your name, as it implies you’re a one-person operation.
What’s more, your name should be memorable, clear, and jargon-less. You don’t want your clients scratching their heads, wondering what you do. They should instantly know what type of services you’re offering. Another piece of advice: make sure your name is easy to spell.
Choose a registered agent
A registered agent is the person who receives all legal mail and court documents from the Secretary of State. These include tax forms, correspondence between the government, service of process documents, and any other type of Secretary of State/government communication.
Freelancers cannot act as their own registered agents, but assigning one isn’t required. You may need to assign one if you don’t have a physical address in your state or you move around a lot. A registered agent can also keep business details (i.e., address) hidden from the public.
File Articles of Organization
To officially form your LLC, you need to file an Articles of Organization with the Secretary of State’s office. The procedures and requirements needed to fill out the Articles of Organization vary between states, and the filing fee will range between $40 to $500 for the same reason.
However, the fill-in details stay the same, such as:
- Freelance LLC name
- Member’s names and addresses
- Business address and phone number
- The purpose of your LLC
- Name and address of the registered agent
- Name and address of the person filing the Articles of Organization
An LLC for freelancers is subjected to a week-long (10 business days) waiting period before they’re officially formed. Arizona, Nebraska, and New York require LLC owners to announce their business in the newspaper. You’ll need to abide by this rule to stay legally compliant.
Once your form is approved, you’ll receive a certificate indicating your freelance LLC is officially registered. Now, you can set up a business bank account and acquire an Employer ID Number.
Get an employer and tax ID number
A one-member LLC doesn’t have to have a business license or an Employer Identification Number (EIN), but it’s good to have one. If you want to be taxed as a corporation instead of an LLC or you plan to have employees in the future, you should absolutely get an EIN and Tax ID.
Create an LLC operating agreement
Creating an operating agreement for your freelance LLC is mandatory, even if you’re operating as a solo entity. This document contains all relevant details about your LLC and its members.
There are many operating agreement templates to choose from and those usually require you to state the following:
- Your roles and responsibilities
- Your legal rights to the LLC
- How profits will be distributed
- How much capital you’ll provide
- Procedure for leaving the LLC
- Voting rights for new members
Although your LLC only has one member, it’s helpful to draft this document with the assumption you’ll take on a partner. If at any point you decide to grow your business, you already have the information you need in your operating agreement. There’s never a bad reason to plan ahead!
Keep your freelance LLC compliant
Your journey of opening your LLC for freelancers is complete, but you’re not out of the woods yet. To keep your business operational, you must stay compliant with federal and state laws, especially when it comes to your tax liability. Some states require an annual LLC report.
If you choose to hire employees, you’ll have to stay on top of payroll and corporate taxes, but there’s no need to worry about that for now. Unless you elect to be taxed as a corporation, S Corp, or C Corp, running your LLC won’t feel any different from running a sole proprietorship.
What solopreneurs should know about running a freelance LLC
It’s really easy to misunderstand business law. It’s overloaded with jargon and terms that fly over your heads. For these reasons forming an LLC for freelancers seems complex when it isn’t!
Forming an LLC won’t protect your intellectual property rights.
Keep in mind that forming an LLC doesn’t automatically place protections on your intellectual property. While an LLC can enact the “work made for hire” clause in copyright, but so could anyone else in the United States, regardless if they run a corporation or business entity.
If you want to place further protections on work you provide to clients (aka, owning what you create), learn about trademark symbols and copyright laws for your jurisdiction and state.
But here’s a freebie: place a clause to retain all rights to your work in your client contracts.
LLCs can be taxed as an S corporation or a C corporation
LLC taxation is complicated, like, really complicated. A lot of solopreneurs make the mistake of switching to a single-member LLC for freelancers, hoping they’ll save money, but they don’t.
By default, single-member LLCs are taxed in the exact same way as sole proprietors. To save on taxes, you would need to form an LLC, then elect to be taxed as an S Corp. You can get taxed as a C Corp, but we wouldn’t recommend it because you’ll be taxed twice (on income tax and dividends). While on the topic, forming a corporation is out unless you want investors.
High-earning freelancers can save big time by keeping the bulk of their salary tied up in the business. This way, they only pay self-employment taxes on the amount they pay themselves.
You Need an EIN to open a business bank account
Remember how we said single-member LLCs don’t need an EIN? That’s because this LLC type is still taxed as a sole proprietor and, therefore, won’t have a need for an EIN or tax ID number.
This causes some confusion when the business owner tries to open a business bank account only to find they’ve been denied. You can still keep your personal and business assets separate via different personal bank accounts, but that won’t offer the limited liability you’re looking for.
To keep your personal and business assets separate and build business credit simultaneously, sign up for an EIN immediately. That way, you won’t miss out on any earned LLC benefits.
Decide if a freelance LLC is right for you
Forming an LLC for freelancers can seem like a pretty confusing process, especially when you have to figure out what information can actually help you start your freelance business. There’s a lot of misinformation out there, but this article should be exactly what you need to get started.
How do you plan on setting up your freelance LLC?
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