Have you reached a new milestone in your freelancing career where, instead of doing jobs for friends and family, you’re doing actual work for companies and other organizations?
One of the biggest reasons why you freelance is to make an income. Many freelancers go about their business by not separating their business from their personal finances. This can prove costly and make tax preparation so much more complicated. However, there’s a tool at your disposal that could help better organize your finances and protect you from unknown liabilities. You may want to look into forming a Limited Liability Company, also commonly referred to as an LLC.
What is an LLC?
The State of Wyoming was the first state to introduce the Limited Liability Company (LLC) in 1977. By the 1990’s, LLC’s became a popular business model.
An LLC is a business structure allowed by state statute. Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner, usually what a freelancer will create.
An LLC establishes a separate “legal person” for your business. You control that ‘person,’ but it is separate from you. Lawyers call this barrier the “corporate veil”, and it is one of the key reasons why people set up corporate entities. Courts will only allow creditors or legal claimants to “pierce the corporate veil” in certain limited circumstances. For centuries, policymakers have developed this system because it is believed to promote entrepreneurship and economic activity.
3 Reasons Why an LLC is great for Freelancers
There are many very good reasons to consider the LLC model for your freelancing business. Here’s 3 reasons why every freelancer should form an LLC.
Reason 1: An LLC Can Protect Your Identity
If you work as a freelancer or contractor, you will most often receive 1099s from clients. As a contracter, taxes are not automatically deducted from income earned. Clients will also want you to fill out an IRS Form W-9. The IRS Form W-9, also known as a W-9 form, is one of the many tax documents required by the IRS to help accurately estimate the taxes owed by contract workers in a given tax year. It’s a request for information about the contractors they pay as well as an agreement with those contractors that won’t have taxes withheld from their pay. Again, contractors must pay their own taxes on this income.
If you have not formed an LLC, then you are a sole proprietor by default and for tax purposes, your Social Security number serves as your tax ID. So the question you have to ask yourself is this: do you want to be handing out your Social Security number to every new client requesting a W-9 form to be filled out?
When you form an LLC, you are able to get an Employer Identification Number (EIN), which is a tax ID number for your business. An EIN is a unique nine-digit number that is assigned to a business entity. EINs allow the IRS to easily identify businesses for tax reporting purposes. This makes your business a legal entity that is separate from your identity as an individual person.
Rather than filling out the W-9 form with your Social Security information, you can simply put your LLC’s information along with the EIN. This protects your Social Security information from being in the wrong hands.
Reason 2: An LLC Can Protect Your Personal Assets
As mentioned earlier, forming an LLC makes your business a legal entity that is separate from your identity as an individual person. This also means your business can get its own bank account and build business credit under the business’s name.
When you set up an LLC, you are creating a buffer between your personal assets and your business. A business bank account with your LLC will separate your personal account and your assets from commingling. With separate accounts, you are better able to manage the revenue from your freelancing work and keep tabs on how much you spend to operate your business. This separation makes it easier to deduct expenses and file your business taxes.
Separating your bank accounts will also be beneficial should there ever be an unfortunate and unforeseen event where your LLC is issued a lawsuit from a client. Remember, an LLC provides you with a “corporate veil” where the LLC would be liable for any lawsuit, not you personally. Things happen. So it’s always best to place yourself in the best possible position to be able to deal with situations like this without endangering your personal finances.
Reason 3: An LLC Helps You Look and Be More Professional
Since you are able to open up a bank account using your LLC’s information, some banks offer incentives for opening a business bank account that has more flexibility than your personal account. For instance, personal checking accounts often limit the size or frequency of transactions. Banks may also give you access to business software programs that link directly to your account. You also can access small business loans, and take up opportunities available by the Small Business Administration.
Forming an LLC also makes it clear to your clients that you operate a professional business. Any work you are doing for the client is being done as a business. An LLC lets you sign contracts under your business’s name. No matter what kind of freelance work you’re doing, whether it’s designing websites or mowing lawns, having an LLC as a legal business entity for your business can help make you look more professional in the eyes of your clients and potential new clients. Signing a contract under your business’s name, presenting a business card that has your LLC’s name on it or creating a professional website for your freelance business that has the name and image of a real company on it, instead of just your own individual name, can be an image-booster and inspiration.
Having an LLC will also make you be conscientious about your business. LLC’s may have annual state filing requirements. Each state has different rules and regulations. It’s important to keep up with the latest requirements of owning an LLC. That, in it of itself, makes you become a more responsible business owner that will translate to becoming a more successful business owner.
In conclusion, an LLC can be a useful tool for helping make your freelance business more successful. I hope you enjoyed this article.
Please note, this article is not intended to provide any legal or financial advise. I’m not a lawyer or financial expert. If you have any legal or financial questions, seek expert advice.