Amid turbulence in the year 2020, the freelance worker population grew 22 percent over the prior year.
Freelancing presents great opportunities for increased earning potential. The appeal of a freelance career has given hope to working adults. Recent college graduates also turned to freelance to survive struggling economic times.
Upwork is a freelance marketplace operating in over 180 countries. They estimated $2.3 billion paid to their freelance talent during one of the most devastating years globally.
But many of the 59 million Americans engaging in freelance work don’t realize how an LLC benefits their business. You too may be asking, “Do I need an LLC to freelance?” The short answer is no but consider the following factors in making a decision.
There exist four main structural entities for business: Limited Liability Company (LLC); Sole Proprietorship; Corporation (C-corp or S-corp), and Nonprofit Corporation. Let’s go a little deeper before answering, “Do I need an LLC to freelance?”
Most small businesses operate as Sole Proprietorships by default. But as a small business owner, your freelance business benefits from declaring an LLC as soon as possible.
An LLC does as its name implies—limits liability. Most likely an LLC makes more sense for your small business. Its structure protects your personal assets.
Next, we explore the differences between an LLC and a Sole Proprietorship.
LLC vs. Sole Proprietorship
Freelancing as a Sole Proprietor means you and your business are one.
To put this in perspective, here’s how Sole Proprietorship affects your business:
- Banks view loans for your business as personal and thus riskier
- Limited availability of equity financing impedes growth
- No liability protection; creditors can confiscate personal assets
- Lawsuits filed against your business place personal assets in danger
If you’re a risk-taker, Sole Proprietorship sounds tempting. But there are several great arguments for choosing LLC instead.
If you care about protecting yourself, your family, and everything you worked hard to build, read on to learn the safer option for freelancers.
Again, let’s put it in perspective by looking at how effects of an LLC:
- Banks consider small business loans less risky
- Debt and equity financing available to support growth
- No personal liability or debts of the company endanger personal assets
- Lawsuits filed against your business don’t jeopardize personal assets
An LLC is a pass-through entity. This means it allows you to deduct reasonable business expenses before calculating taxes. The remaining profit passes straight through to your personal income tax return.
The tax benefits of an LLC also make it most preferred by small businesses. So whether you’re a novice or your freelance career started years ago, it’s not too late to declare an LLC. And filing for an LLC works no matter the type of freelance business you operate.
Do I Need an LLC to Freelance?
Freelance work is exciting and offers you a range of career opportunities. It also presents personal risks depending on your business structure, or lack thereof.
The reality of your freelance small business doesn’t beg the question, “Do I need an LLC to freelance?” The better question remains, “When and where do I file for an LLC?”
Contact the School For Freelancers and learn how to freelance the right way.