Shake Logo

Freelancing? Consider Forming an LLC

by Alex Lipton

Freelancing? Consider Forming an LLC

If you regularly do freelance work, forming a Limited Liability Company (“LLC”) could offer you and your clients legal, professional, and economic benefits. Let’s take a closer look.

Limit Your Liability

The name — Limited Liability Company — says it all. If you choose not to form an LLC as a freelancer, you are considered a sole proprietor. This means that if your business gets sued, you get sued — putting your personal funds at risk. By forming an LLC, you limit the liability you face as an individual for incidents that occur during the course of your business. So when your LLC is sued, your personal assets are typically protected from the suit.

Forming an LLC doesn’t protect you from every kind of liability. If you run an illegal business, engage in fraud, or injure someone as a result of your personal negligence, you will likely be personally liable. Though it doesn’t protect you from all lawsuits, the LLC saves you from putting all of your assets on the line any time your business gets sued.

Look Professional

Forming an LLC can add legitimacy to your business and attract new clients. Clients notice the difference between “Frank Underwood Design” and “Frank Underwood Design, LLC”. It sends a clear signal that you take your business seriously and will treat clients with the attention and respect that they deserve.

Easy to Manage

Freelancers choose LLCs over other business entities, like corporations, because they cost less to set up and involve little paperwork. In Delaware, for example, you can (almost entirely) set up your LLC by paying $90 and filling out a single page.

That said, if you decide to form an LLC out of state you will need to find a registered agent who maintains a residence in the state. You will also need to comply with any of the state’s rules and regulations for maintaining an LLC. Though this involves more red tape than remaining unincorporated and just doing business in your own name, for many freelancers, the benefits outweigh the paperwork.

Freelancers also typically prefer LLCs over corporations because LLCs involve less work to maintain. When you form a corporation, you have to file a separate tax return for the business. For many freelancers, this involves hiring a tax or accounting professional to help organize and file the return, cutting into your profits. In comparison, you only file one tax return (your own personal return) for an LLC, making taxes much easier to manage. 

Help Your Client

Courts and tax authorities make an important distinction between “employees” and “independent contractors.” Employers have greater liability over the actions of their employees than clients do over the actions of the contractors with whom they work. Employers are required to comply with labor laws and withhold taxes from their employees, whereas with independent contractors, employment laws do not apply and contractors are responsible for their own taxes. As a freelancer, you can help your client avoid potential liability for back taxes and non-compliance with labor laws by doing your part to ensure that your relationship is structured as that of a client and independent contractor.

There’s no single factor determining whether a worker is an employee or an independent contractor. Courts and tax authorities will evaluate the level of behavioral and financial control the client maintains over your work.

So what does an LLC have to do with all of this? When you operate and bill your client through that LLC, it’s an important signal of your behavioral and financial independence, especially when you’re serving other clients at the same time. Again, it’s not definitive, but it can be a strong indication that you are an independent contractor.

***

Forming an LLC can help you protect your personal assets, improve your professional reputation, and bring peace of mind to your clients. As always, it’s a good idea to talk through the pros and cons with an experienced attorney.

 

Alex Lipton is a Legal Researcher at Shake and a Mitchell Jacobson J.D. Scholar at NYU School of Law. He also serves as Vice President of Operations for the InSITE Fellowship. He writes about legal issues affecting early-stage companies. Find him on LinkedIn or on Google+.