When it comes to freelancing, there are a lot of pros and cons that come with the territory. Do you need an LLC to freelance? What are the benefits of freelancing?
How can you make sure that you’re doing it right? In this blog post, we’ll explore all of these questions and more! So whether you’re just starting out as a freelancer or you’ve been at it for a while and are looking for ways to improve your game, read on!
Amid turbulence in the year 2020, the freelance worker population grew 22 percent over the prior year. The freelance economy is booming. As a freelancer, you can choose the projects you want to work on, set your own hours and rates, and enjoy more freedom than many traditional jobs offer. Sounds great so far, right?
But before you quit your day job and dive into the freelance life head-first, it’s important to understand what you’re getting into. Do you need an LLC to freelance? Do you have to pay taxes on your earnings? Is it safe for me if I’m a full-time freelancer with no safety net?
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?”
Your freelance business needs an LLC. You need licenses and permits to operate your freelance web design, writing, or photography business. But before we cover those details, let’s define the benefits of freelancing with an LLC.
Benefits of Freelancing as an LLC
An LLC helps you protect personal assets from liability risks associated with freelancing work. An important benefit for your peace of mind in knowing that creditors can’t take everything you have worked hard to accumulate over a lifetime.
Another great benefit is tax efficiency: Filing taxes under personal income rather than corporate rates decreases overall costs year after year depending on state law and revenue generated by your small business operation. This means more money in the bank for you.
The difference in taxes between an LLC and Sole Proprietorship is significant. For example, if your earnings are $100,000 annually and you’re taxed at 40%, that means your business pays $40,000 to the IRS. If you’re a Sole Proprietor paying self-employment tax on this same income of $100,000 equals about 15% or almost double what you pay as an LLC owner! Do I need an LLC to freelance? Yes! Freelancing becomes less complicated when accounting for your small business operation.
How Do I File for an LLC to Freelance?
Filing for an LLC is a very simple process that requires less than five minutes of your time. In most states, you can even complete the entire process online in one sitting! But before you hit “Send” on the filing, take a moment and make sure you have everything ready to go. This makes it easier later if anything goes wrong with your filings or if there are additional requirements depending on where you live and what kind of business structure you need based on state laws that vary across the country.
Here are some things worth checking before filling out paperwork:
- The name of your new company should be available in all the states where you intend to do business.
- Do a quick online search to make sure the name is available and not already in use by another company
- Be prepared with your company’s EIN (Employer Identification Number) which you can easily obtain from the IRS
- Have your registered agent information on hand. This person will be responsible for receiving official documents on behalf of your LLC, so choose someone you trust!
- Double-check your state’s filing requirements
Some states don’t require a registered agent, others do. Some have an annual fee for the LLC, some don’t. Do your research and make sure to file in the correct jurisdiction to avoid any potential problems down the road!
Learning the pros and cons of freelancing and how to do it right is essential for a successful career. Protect your personal assets by forming an LLC, take advantage of tax efficiencies, and be sure to research your state’s filing requirements so you can be in compliance with all laws.
Freelancing can be a great way to make extra money or even transition into full-time self-employment; just make sure you’re doing it the right way!
Is Freelancing Difficult?
As the COVID-19 pandemic continues to affect the ways that we live and work, people are increasingly looking for new ways to make a living.
Freelancing has become one of the most popular methods for people to make money during this difficult time. Many are wondering what it takes to be successful as a freelancer; here’s some advice on how you can get started!
Freelancing is not easy, but it can be done if you have the right attitude and work ethic. Do your research before starting out so that there aren’t any surprises along the way: know what kind of projects will pay well in advance (and which ones won’t), find an area where there’s plenty of demand from clients who need help with their business needs like web design or content creation services.
Sign up for online courses such as Udemy or Skillshare about marketing strategies and SEO optimization techniques, make sure you’re familiar with local laws regarding taxes before starting any venture that requires payment by clients (if applicable). Learn how to use social media platforms like Twitter or Instagram effectively so they’ll be able to reach their audiences successfully.
You’re the boss – This is the most rewarding thing about freelancing: you’re in charge of your own destiny! You set your own hours, work from anywhere, and don’t have to answer to anyone else. The hardest part may be getting started but once you get going it’ll feel like second nature with all these perks
Work-life balance – Do what you want when you want! If you want to take a day off work to go to the beach, go for it! As long as you’re getting your work done and meeting deadlines, there’s no need to adhere to a traditional nine-to-five schedule.
Flexibility – Do you have an opportunity come up that you can’t refuse? No problem! As a freelancer, you have the freedom to take on projects as they come. This also includes being able to say no if you don’t feel comfortable taking on a new project.
Earning Potential – Do you have a skill or talent that can be monetized? Do people want what you’re selling but aren’t willing to pay full price? Do they just need some help getting started? Go ahead and charge them! You’ll make more money this way, especially if it’s something difficult for other people.
Upward Mobility – If your work is good, you’ll get more clients. If your prices are too low, you won’t have any customers. Do well enough and soon enough people will come knocking at your door looking to hire you full-time!
Tax Benefits – Are there tax deductions available for freelancers? Yes! You can deduct all kinds of things like business expenses, travel costs, and more. Do you run into a problem that’s causing your taxes to go up? Hire an accountant or certified public accountancy firm for help!
No strings attached – Do you want out of the freelance game? Do so at any time without having to worry about severance pay or being fired! All freelancers are independent contractors, which simply means that they’re not employees of the company for which they work.
No benefits – Do you get sick a lot? Do you have medical needs that need to be taken care of? Are you covered under someone else’s insurance plan? Unfortunately, as a freelancer, you will not have access to any of these benefits. Do you need dental work? Pay out-of-pocket or find a dentist who accepts cash patients.
Do you get sick a lot and can’t afford your meds? Don’t worry! You can still take care of yourself with the money saved from avoiding expensive health insurance premiums by using telemedicine instead.
Do you have children? How will they get to school if both parents work out-of-home jobs? Do you need daycare services? These are just a few examples of expenses that freelancers do not always think about when deciding whether or not it is worth working for themselves.
No job security – Do you have a bad feeling about that new project? Do you think the client is going to be difficult? Are you starting to feel overwhelmed with work? Start looking for another job immediately because, as a freelancer, you are always one step away from being unemployed.
No retirement plan – Although a retirement plan does not come with every full time job out there, it most certainly does not come with freelancing. There is a lot to consider when you get started freelancing and saving for retirement is something almost half of freelancers neglect.
This is alarming because it can lead to serious financial issues down the road. It is actually quite simple to save for retirement as a freelancer, you just need to do it. Our favorite way to save for retirement is through Wealthfront. It is easy to set up, mostly automated, super low fees compared to the other options, and the returns are much amazing.
Overall, whether or not freelancing is worth it depends on your situation. Do you have a full-time job with benefits? Do you want to take some time off work and travel the world? Do you need extra cash while attending college? Do you just want more freedom in life?
Decide what’s important to you and then decide whether or not freelancing is worth it. Do you have more questions about working as a freelancer? Do not hesitate to ask! Do you think I missed something important in this post? Do leave me a comment below!
Contact the School For Freelancers and learn how to freelance the right way.