Should Freelance Writers Form an LLC?

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As your freelance business grows, it becomes necessary to decide how you want to operate and manage your business. At some point, most freelancers must consider how they are going to operate on a business level. An LLC business might just be the way to go.

LLC companies are more fitting for the advanced freelancer that has grown their business and plans to continue operating for the long haul. It really doesn’t make sense for beginner-level freelancers to form an LLC. We will go over when it makes sense to form an LLC as a writer.

The LLC can offer a lot of businesses, including limiting your personal liability, the flexibility of ownership pass-through taxation, and reduced business paperwork. We’ll dig a little deeper into these benefits as we progress.

Table of Contents

What is a Limited Liability Company (LLC)?

An LLC, or limited liability company, offers a means of protection for your businesses. An LLC can function perfectly as a transition for both sole proprietors and partnerships in a means to pass through earning and taxation.

Each state has its own requirements and allowances when it comes to forming an LLC. This includes fees, filing, and more. Be sure to look up the regulations in your state to be fully aware of the process for establishing and maintaining an LLC wherever you may be located. The state in which you reside and their regulations might actually make a significant difference in whether or not an LLC is right for your freelance business.

Forming an LLC offers your business a more official appeal should you reach the point in growth and clientele that this becomes the appropriate option for your freelance work. The business structure itself offers a lot of benefits for the small business structure.

Establishing an LLC is quite simple to do. You start by choosing a name to file the initial paperwork. In the process, you will establish members, partners, and a registered agent for the business, as well as apply for your tax ID number for the business if you don’t already have one. There are services available to help you with the legal paperwork required or you can hire an attorney as well.

Perhaps one of the greatest benefits of establishing an LLC is the fact that it gives you the capabilities to separate your personal from your business. In other words, you’re protected on an individual level as the assets of the business are handled on a member and owner basis.

Why You Should Create an LLC (Over Sole Proprietorship)

There is nothing wrong with operating under a sole proprietorship, particularly when staring out. If you’re new to the freelance business, don’t feel as though you should rush out and immediately establish an LLC, the cost and effort of doing so may not be right for your business just yet.

Any single business operation is automatically a sole proprietorship until you do something to make it legally otherwise. If you’re running a business, servicing clients, and making money, you are a sole proprietorship, probably operating under your individual tax identification number (or SSN).

Advantages of Forming an LLC for Freelance Writers

An LLC basically separates the person from the business and provides some protection for your personal assets that a sole proprietorship simply isn’t able to offer. The purpose of the LLC is to protect your personal assets from liability. It separates personal assets from business assets.

Here are a few of the major advantages of an LLC

  • Lawsuit
  • Legal matters
  • Debt issues
  • Bankruptcy matters
  • Professionalism
  • Flexibility in structure

Should you get tossed into a lawsuit unexpectedly, you certainly don’t want your personal assets at risk. Another protection entity of the LLC would also come into play should you run up against debt or bankruptcy issues with the business or on an individual level.

Operating on an LLC level gives your clients the satisfaction of knowing you have taken a professional and legal approach to your business. It gives your business a sense of legitimacy from a client’s perspective.

As an LLC owner, you are free to hire employees and adjust the membership of your LLC as necessary. If your business continues to grow, you may just need additional help down the road.

One more thing to touch one here. As your revenue continues to grow, you may reach a point where it becomes necessary to make changes because your business income has reached a substantial level. In this case, an LLC might help you on a tax level in comparison to a corporate structure.

Disadvantages of Forming an LLC for Freelance Writers

While we discuss the topic of should freelance writers be an LLC, we think it’s important to touch on the disadvantages as well. If you’re considering taking this leap, you should understand all varying aspects before making a decision.

Here are a few of the most considerable disadvantages of forming an LLC

  • Banking practices
  • Various fees from various sources
  • Maintaining required legal paperwork and filings
  • Compliance

Banking practices are more of an inconvenience than anything else. Where you are used to combining your personal and business finances, if you form an LLC it will become necessary to keep the two separate.

The fees of forming and maintaining an LLC might add up quickly. Initially, the fees can be heavy but you should be aware of any fees you may face at any time. These fees include bank fees, state and federal filing fees, legal fees, business service fees (such as LegalZoom), and more.

There will be continuous legal paperwork. Some of the paperwork happens on a routine annual basis. This is where it may be useful to have some sort of legal representation, even if it is an online service. Taxes, filings, and annual updates are just some examples of routine legal paperwork.

Finally, consider that you will need to know and understand what it takes to remain compliant within your business. Compliance primarily relates back to getting all of the necessary legal documentation filed on time but there could be additional issues that you face.

Why Choose an LLC Instead of a Corporation (Inc.)?

Many people think that an LLC and a corporation fall into the same category. The truth, however, is that they are really quite different.

In a corporation, ownership belongs to shareholders. A board manages it and shareholders have a stake in the company. This means all shareholders own a certain percentage of the company, which gives them legal claim.

On the other hand, an LLC has owners and members, with separated rights and responsibilities. An LLC can have just one owner or it may have multiple owners. If there are other parties involved, they can be members rather than owners.

Both of these types of business ownership offer their own advantages and disadvantages. From a freelancing perspective, an LLC is probably going to be more fitting for your needs. Both of these offer personal liability protection and protect personal assets.

An LLC gives you some flexibility as far as both management and taxes go. With an LLC, you can be taxed as either a partnership or a corporation, depending on which is more fitting for your business. In both structures, profits can somewhat be passed through to owners, although it’s different terminology and processes.

An LLC will not pay taxes directly. The income is passed through and the LLC operates on pass-through taxation where the owners are then responsible for the taxes of the pass-through income. This allows income to be taxed on a personal income basis.

When it comes to simplicity, maintaining legal LLC status is by far the simplest form of business to work with. It has fewer annual requirements that are easier to abide by.

Formal Differences Between an LLC and Inc.

To simplify the information so far, here is a simple breakdown of the differences between LLC and Corporations when it comes to formalities. This makes a good reference point for understanding their primary differences.

Inc.

  • Corporations have a board of directors, shareholders, and officers. This may be challenging for an individual freelancer business.
  • High-level maintenance requirements, including additional required annual filings and recorded annual meetings.
  • Additional taxation, potentially double-taxation on personal and corporate assets.

LLC

  • Profits are passed to members and owners and taxed on an individual basis.
  • No initial investment required
  • Business-level protection of personal assets
  • Simple compliance requirements
    • o No board of directors required
    • o No recorded annual meeting required
    • o No by-laws required

Using Online Services to Create an LLC

Perhaps what is holding you back the most from flipping the switch and establishing an LLC is the concern for finding valid legal representation that isn’t going to cost a fortune.

In order to ensure things are done properly, it’s important to have some sort of legal go-to to guide you and help you stay compliant through the process. Attorneys can become quite expensive in terms of fees, especially when you’re working on initial establishment of the LLC.

However, there are legal services that can help you form an LLC and guide you through the process. LegalZoom is perhaps one of the most well-known online services for this process.

When you form an LLC, you can choose to be your own registered agent but it may be beneficial to have another company or individual be your registered agent. The registered agent acts as a responsible third-party in a legal capacity for the business.

This registered agent can receive tax and legal notices on behalf of the LLC during normal business hours. This means if you have to be away from your home, you can ensure that important documents are always received if you use someone else as a registered agent.

Benefits of Using an Online Service

Using an online service provides you with a reliable and experienced service that guides you through creating your LLC. It’s a valuable service that could save you some money and frustration.

Online services such as LegalZoom walk you through the processes step-by-step. They provide you with various package options that allow you to choose what is best for your business.

Using a service such as this provides you with expertise in the field and the ability to stay compliant. And the best part is, you just pay a reasonable fee for the service. It’s not an overwhelming amount of money that will break the bank.

Be careful with packaging as the costs could quickly add up. If you’re not selective, you may find that it is just as advantageous to hire an attorney or firm.

Here are some of the services available.

  • Customer service contact or portal for questions
  • All documentation is created digitally
  • Junk mail is greatly reduced

Using LegalZoom to Create an LLC

To give you a clear look at the cost of using an online service, we’ve broken it down for you.

LegalZoom does charge fees for their services. They have various packages but you should understand the costs before you dive into the process. All fees are tax-deductible. LegalZoom’s fees do not include state and federal filing fees.

  • Base fee – $79 starter fee (attorney, expedited processing, registering agent, filing fees are all additional costs)
  • Registered Agent – $249 annually
  • Additional Services
    • o Operating Agreement – $99
    • o Operating Agreement & EIN – $159
    • o Operating Agreement, EIN, & Licenses – $199
  • Package: Attorney and tax consultant for form review, access to legal form library – $39.99/month
  • Package: Total compliance, coverage of fees and penalties for late deadlines, manager provision, annual filing services – $280 annually
  • Processing Costs
    • o Economy – 30 business days $79 + state fees
    • o Standard – 15 business days $329 + state fees
    • o Express Gold – 10 business days $349 + state fees

Conclusion

If your freelance business has reached the place where it’s no longer feasible to operate on a sole proprietorship level, an LLC is the best solution for legal business establishment. It provides the flexibility you need as an individual as well as asset protection and income pass-through.

Additionally, with an LLC, you will find that you have a professional business appearance for your clients, increasing your credibility in the field. This could result in increasing your revenue even more.

It is up to you to determine whether the switch to an LLC is practical for your business. Consider the advantages and disadvantages as well as the requirements in order to make a sound and informed decision. Remember, you don’t have to go it alone, there are services like LegalZoom that can be quite helpful for you in the process. 

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