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?
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 and other types of business entities, LLCs are ridiculously easy 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 many 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 pretty easy, it is 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. Again, this can make it harder to justify creating this formal business entity.
- Future ambitions. If you’re looking to expand your freelance business in a different way, like if you plan 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.
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.
By: Anna Johansson
Anna is the founder and CEO of Johansson Consulting where she works with businesses to create marketing and PR campaigns.