There are advantages and disadvantages to starting a LLC for freelancers. Weighed with alternatives like being a sole proprietor or forming a S-Corporation, you have to decide what is right for you.
Forming a single-employee Limited Liability Corporation, or LLC, as a freelancer is one of the more popular choices out there. It costs relatively little, requires less paperwork than some other forms of incorporation, and offers considerable tax benefits in some situations.
So here’s the scoop (and keep in mind this is for informational purposes only, and here at Almost Millions we 100% recommend talking to a qualified accountant or tax professional):
WHAT IS A LLC, ANYWAY?
A LLC is a specific type of corporation which, in many states, costs less to incorporate than a conventional corporation or S-Corp. It also requires less paperwork.
LLCs can help save costs in taxes for freelancers making over $50,000 yearly in many circumstances, and also–as the name Limited Liability Corporation indicates–protects the assets of LLC owners in case of lawsuits or court visits.
THE GOOD PARTS OF FORMING A LLC FOR FREELANCERS
While LLCs don’t offer all the tax advantages of S-Corps for freelancers and the self-employed, they have two important advantages.
First off, they cost less to set up and maintain. Fees for LLCs in many states are generally cheaper (in many cases, hundreds of dollars less a year) than they are for regular corporations. They also don’t require the regular paperwork that S-Corporations require, which cuts into profits for single-employee corporations by requiring an accountant or bookkeeper in many cases.
In addition, they offer legal protection. In case a business transaction goes south and the worst happens and it turns to lawsuits or vendors turning collection agents on you, having a LLC offers a legal shield from losing your home or personal possessions.
THE BAD PARTS OF FORMING A LLC FOR FREELANCERS
If you’re making more than $75,000 a year as a freelancer or self-employed worker and want to increase your tax savings, it’s almost always smarter to form a S-Corporation. The exact savings vary from state to state; it’s smart to ask an accountant or tax professional for advice.
In addition, LLCs, because they tax your business income as personal income, are not the best choice if you already have a full-time or part-time job that shows up on your tax return. If you’re only moonlighting as a freelancer, a S-Corporation may be the smarter choice if you choose to incorporate.
SO WHAT TO DO?
Honestly, it all comes down to the time you have to devote to administrative tasks and how much money you plan to make.
If you plan to make $25,000 or under yearly as a freelancer, being a sole proprietor is the smart money choice – just make sure to get liability insurance.
If making between $25,000 and $100,000 yearly as a freelancer or as a self-employed professional, it may make sense to incorporate as a single-employee S-Corporation or LLC rather than as a sole proprietor. Talk to your tax professional to see which option benefits you the most. In some states, a LLC might make more sense than a S-Corporation while the converse is the same in other places. Almost Millions highly recommends you speak to an accountant or tax professional to find the right choice for your growing freelance business.