These days, it’s pretty easy to run a business as a freelancer. Thanks to the plethora of online tools available to ambitious young professionals, it’s a simple matter to create your own website, manage a professional email address, and start attracting clients. Depending on what type of freelancing you’re doing, you might be able to conduct your business entirely remotely; for example, graphic design and content writing freelancers are more common than ever.
However, as you begin to develop your business and start working with bigger and more diverse clients, you might consider taking your career more seriously. In some cases, that means creating a corporate structure — an official business entity — for your operations rather than remaining operational as a sole proprietorship (which many freelancers are, by default). A corporation typically doesn’t make sense for a freelancer — it’s super complicated to start one and doesn’t offer many advantages to someone frequently working by themselves.
However, a limited liability company (LLC) might be more promising. Should you start an LLC for your freelance business?
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Entity Types for Freelancers
There is a vast difference between legal entities. Most solopreneurs form an LLC because it’s easier and less complicated than an S corporation or C corporation. Corporations are best suited for businesses with multiple owners. Congress enacted the S corporation tax code in 1958 to encourage the formation of small and family businesses by eliminating the double taxation of the C corporation.
Forming an S corporation can potentially lower the amount of self-employment tax you owe, but it’s not necessarily the right choice for a freelancer. For instance, an S corporation is limited to 100 shareholders, is required to be a domestic business entity, all shareholders must be U.S. citizens or legal residents of the U.S., and is restricted to one class of stock.
If you plan to expand your business and grow your company, an S corporation might be the best option for you. If you already have an LLC and want to convert it to an S corporation, you can do that, too.
When you’re a freelancer picking up gigs on Craigslist, you probably don’t need to form a corporation but consider forming an LLC. You can take a handful of routes to form an LLC, but LLC services like ZenBusiness and Bizee have exploded in popularity over recent years.
The Advantages of an LLC
Let’s take a look at some of the advantages you’ll gain by creating an LLC for your business.
- Simple establishment. Compared to a corporation, LLCs are easier to start. The procedures can vary by state since LLCs are often managed at the state level, but generally, you’ll just have to provide some basic information about you and your business partners to officially register. You may also need to take care of some other paperwork, like getting a federal tax ID number, but none of these steps requires much time, money, or effort.
- Liability protection. The big draw of LLCs is that they’re treated as separate legal entities. In other words, they can shield you, the individual owner, from many types of liability issues. LLCs keep track of their own finances, so they can take on debts as a business rather than forcing you to take on personal debts; in this way, your assets are covered if you’re ever unable to pay back a business loan with business proceeds. LLCs can also shield you from some legal claims against your business — though you should be aware that this protection is not complete, and you can be held personally liable in some contexts.
- A more professional image. Being able to stick an “LLC” after your name can make your brand seem more professional. If you’re having trouble being taken seriously when talking with clients, or if you just want to take your freelance business to the next level, this may help you.
- Tax advantages. Unlike corporations, LLCs don’t owe a federal-level corporate tax rate. Instead, they’re considered “pass-through” entities. The LLC keeps tabs on its own income and expenses. Only when you collect money in the form of salary or profits will you be taxed as an individual; in this way, you’ll have more control over how much money you collect and how you’re ultimately taxed.
- Partnership potential. LLCs are also a convenient way to partner up with someone else. If you’re considering merging your freelance operation with someone else’s, this can give you a stronger basis for operating — so long as you have a strong LLC operating agreement backing you up.
Are there downsides to starting an LLC?
Those advantages seem nice, but are there any disadvantages to starting an LLC?
- Time and effort. While starting an LLC is easier than a corporation, it’s still going to take some time and effort. You’ll need to look up the specific laws and rules for LLCs in your state, fill out the paperwork, and in many cases, file an annual report.
- Upkeep fees and taxes. Some states do tax LLCs at the state level, which can make LLCs less advantageous for freelancers who live in those states. Other states charge regular fees for their LLCs, such as an annual report filing fee.
- Future ambitions. If you’re looking to expand your freelance business in a different way, such as planning to start an agency eventually, an LLC may not be a good fit. Accordingly, it may be in your best interest to wait and start a different type of business entity. However, this disadvantage is minor and extremely situational.
Protect your freelancing gig from financial liability
Website development is a popular industry for freelancers, and it’s also the most volatile in terms of potential for being sued by unhappy clients. If you’re a freelance web designer operating without the protection of a legal entity, you need to be careful. One dissatisfied or disgruntled client can ruin you financially.
Developers regularly get sued by clients for a number of reasons including not delivering according to the agreement. Some clients don’t understand the inevitability of delays and malfunctions in complex projects and aren’t willing to be flexible.
Security flaws are another point of contention that cause clients to sue developers. As a website designer, it’s your job to secure the project whether you do it yourself or hire someone else. For example, if you create a WordPress website, it takes effort to secure the installation. If you’re a self-taught developer using one-click installation tools and you don’t understand salts, SSL, and disabling PHP file execution, you won’t be able to properly secure a WordPress site. If a client gets hacked, you can be held responsible for damages.
It’s also your job to inform a client when they’re responsible for performing security updates like updating plugins and the WordPress core. Failing to inform the client of their duties could get you sued if the client is expecting you to do the work.
Copyrighted Images
Some people think images found on Google are free to use, but that’s not true. Unfortunately, web designers get sued all the time for copyright infringement when they use images they know they shouldn’t.
Sometimes, the copyright holder sues the owner of the website, and the website owner sues the designer who created the website. Courts in the U.S. and the U.K. consistently hold web designers responsible for infringement, since there is an implied duty to carry out the work without copying someone else’s material. This should be a good enough reason to form an LLC immediately, regardless of the cost!
Even if a client asks you to use a copyrighted image, you can still be held legally responsible. Without the protection of a legal entity, your bank account and personal assets could be drained to pay for your mistake.
Ultimately, there are a lot of advantages to enjoy when you turn your freelance business into an LLC. It’s not the right move for every freelancer, but it’s definitely worth considering. Look up the LLC rules and regulations in your state and weigh the pros and cons as they relate to you, specifically. Only you can decide what’s right for your business.
Anna Johansson is the founder and CEO of Johansson Consulting, where she works with businesses to create marketing and PR campaigns.
