If you’re starting out as a freelancer, often, one of the first pieces of business advice you’ll get is to set up an LLC. OK, then, how do you set up an LLC as a freelancer—and, wait, why do you want to do this, exactly? These are both really, really good questions, and if you’ve just jumped head first into solopreneurship, you shouldn’t feel shy about asking them. Most freelancers are in this position, too.
Although easy, knowing how to set up an LLC as a freelancer isn’t something you would know how to do offhand. And it’s important you know what’s ahead, since there’s more to it than simply filling a form and paying a setup fee. Most states have annual maintenance requirements in order to keep your LLC active, and there are some potential pitfalls if an LLC is not set up and maintained correctly.
Here’s everything you need to know about how to set up an LLC as a freelancer. Let’s start by looking at what an LLC is… and what it definitely is not.
First, What’s an LLC?
Greetings, new freelancer! If you’re going to figure out how to set up an LLC as a freelancer, you should probably master what an LLC is first, yeah?
“LLC” is short for “limited liability company.” LLCs are distinct legal entities formed at the state level, under the laws governing that state. They’re also the least complex business structure, aside from sole proprietorships.
When you form an LLC, you’re no longer considered the “owner” of your business, but rather a “member” of the LLC. This doesn’t change the fact that you own your business, but it’s an important legal distinction.
And This Is Good… Why?
In most cases, the member or members of an LLC are not personally held responsible for any debts or legal liabilities incurred by the business. Which sounds pretty nice!
The legal protections alone are a very compelling reason for a freelancer to set up an LLC. Without the protections afforded by an LLC, a freelancer whose business experiences financial difficulty could lose their personal property and savings in a bankruptcy. And even if you aren’t offering services in a high-risk field, with the litigious nature of business, you could find yourself facing a lawsuit at some point in your business’ lifecycle. Setting up an LLC for your freelance gig will help protect you personally from any legal claims.
But Wait, There’s More
Another compelling reason to set up an LLC as a freelancer: An LLC gives your business the appearance of credibility and of being more established than it may actually be. Especially when you’re first striking out as a freelancer, forming an LLC could give you a leg up on your competition.
And Here’s What an LLC Is Not
Let’s talk tax designation. Although your business might be an LLC, an LLC isn’t a federal tax designation. Though some states do assess an annual tax on LLCs, in most cases, as a freelancer your tax designation will be that of a disregarded entity. This basically means you’ll file your taxes the same as a sole proprietor would.
Is That Good?
Well, it can be!
An advantage of an LLC from a tax perspective is that you can make a special election to be taxed as a corporation. (Otherwise, you’ll just be taxed as a pass-through like any other LLC, which means that your LLC profits will be “passed through” to your personal tax returns, hence the name.)
This is typically neither necessary nor recommended until you reach a significant level of annual net profit. Speak with your tax advisor about your specific tax situation, though, as your personal tax situation will also have a bearing on when you should elect corporate tax treatment.
What to Watch Out for When Setting Up an LLC as a Freelancer
So far, we’ve looked at the benefits of forming an LLC as a freelancer. There are, however, a few pitfalls to watch out for if you don’t form and maintain your LLC correctly.
Let’s Talk Documentation
A lot of people believe that all they have to do to set up an LLC as a freelancer is fill out a form with their secretary of state and pay a nominal fee—usually under $100. Although this does register your LLC with the state in which it is formed, completing the form and paying the fee is actually not the most important part of forming an LLC.
As part of your LLC formation, you must also file a document called “Articles of Organization.” This document isn’t a formality that you can skip over or get to whenever–so don’t make this mistake! The Articles of Organization is a critical management document, and in some cases is the determining factor in whether or not the members of the LLC are fully protected financially and legally.
And isn’t that why you did this in the first place? That’s why it’s never a bad idea (read: a good idea) for a freelancer setting up an LLC to consider seeking legal assistance to ensure the Articles of Organization are adequate.
Anything Else to Worry About?
A little more paperwork.
Even if your LLC is set up to exist in perpetuity‚ meaning there’s no specific timeframe for the duration of the LLC, you’re typically going to be required to file an annual report and pay an annual filing fee. The ongoing filing requirements, frequency, and amount due vary quite a lot from state to state, so it’s super important to check with the governing authority for LLCs for your state. A state-level overview will help to start.
If you don’t do this, it’ll technically render your LLC inactive. Some states will even dissolve your LLC completely if the annual filing requirements aren’t met. (See, important, like we said.) In many cases, all you need to do is have to file the required reports, which are pretty simple, and pay any past due annual fees to reactivate your LLC. But it can still be problematic if your LLC is inactive during a time when your business experiences a financial or legal event, so set reminders to stay on top of this stuff.
One More Financial Note
Finally, you must treat your LLC as a separate entity.
One of the easiest ways to do this is to keep your business and personal finances completely separate. It’s really important for your accountant to do your taxes accurately, anyway, and if you’re ever in a position to turn your business into something bigger—like a consultancy, for instance—having a business bank account is a huge deal to be able to qualify for any type of small business financing down the road. You might as well set up an account now (and lots of free business checking accounts are out there).
Failing to do this could give a savvy attorney all the ammunition they need to circumvent the protections of your LLC, putting your personal assets at risk if you ever have an issue.
How to Set Up an LLC as a Freelancer: The Steps
Now, let’s get into the actual process of how to set up that LLC.
As we went over, the actual formation of an LLC as a freelancer is relatively easy. In many states, you can file the required forms and pay the filing fee online. This is typically done with your secretary of state or franchise tax board, but each state is different. LLCUniversity.com has compiled a list of required fees and governing authorities for each state.
Some states also have some quirky requirements in place for LLC formation. For example, in Arizona, Nebraska, and New York, newly formed LLCs are required to publish notices in local newspapers in order for the LLC to be considered legally formed. (It’s a weird, archaic rule that’s kind of a pain, but you’ll laugh about it with other solopreneurs once it’s over, promise.) Other states require special business licenses and sales permits.
No Matter Where You Live, These 3 Steps Are Essential
Regardless of your state’s laws, there are a few things you should do soon after you set up your LLC:
1. Get an EIN (Employer Identification Number).
Even freelancers with no intention of hiring employees should apply for an EIN. Why? You can use your EIN on W9s and other required forms, protecting your Social Security number from clients and vendors. You can file for and receive an EIN immediately at the IRS website.
2. Set up business bank accounts.
Most banks will require you to set up entirely new bank accounts for your LLC. Although this may seem like an inconvenience, it will actually help protect you should a claim be made against your business. Your new bank accounts should be set up in your LLC’s name and with your new EIN. To prevent frustration, check in with your new bank prior to going in to make sure you have all the required information on hand.
3. Get insurance.
Remember, your LLC is a separate legal entity. Even if you had insurance as a freelancer or sole practitioner, now that you’ve formed an LLC, you must get insurance in your LLC’s name.
Setting Up an LLC as a Freelancer Has Huge Benefits
As a freelancer, setting up an LLC is one of the most important things you can do.
By forming an LLC, you’ll be protecting yourself both financially and legally. Of course, there are some requirements to meet to ensure you’re getting the best protection from your LLC, but with a little planning, the requirements are minimal compared to the benefits.