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#FreelanceFriday: What Are the Benefits of an LLC?

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  • Tip Bones

Welcome back! This week, I want to talk about LLCs, or limited liability companies. When you first start out freelancing, you probably don't need to form one right away, depending on the work you perform. But once you start to get a good cash flow, and definitely by the time you freelance full-time, it's important to consider that an LLC might be a benefit to you.

Unlike a sole proprietorship, which is what you have if you don't have any business paperwork as a freelancer, an LLC protects you from personal liability in your work. This is because, as a sole proprietor, you are the same entity as your business. An LLC has members (and yes, single-member LLCs are very popular for small business models), and that separates the owner from the business. But why might you want that kind of protection?

If your business gets sued or behind on taxes, as a sole proprietor your personal assets are at stake. But with the protection of an LLC, your home, car, and any property not owned collectively by the members of the LLC under the business name aren't in immediate danger.

Registering an LLC is fairly easy, too. Unlike a corporation, most U.S. states only require a few pieces of paperwork and an annual report to make your LLC official. You may want the guidance of a lawyer in forming your initial articles of organization and operating agreement, and you could consider asking them to serve as your statutory agent, but this isn't a requirement. In fact, as long as your business name is available, you can probably go to your state's corporation commission website right now, pay a small registration fee, and make it official, if you have the right documents! The best part? That registration fee is probably tax deductible.

Speaking of taxes, LLCs have some of the easiest business taxes you could hope for. The IRS can consider an LLC a sole proprietorship (or partnership, if you have more than one member), and many single member LLC business owners elect to pass the tax liability of their LLC to their personal income tax. That's definitely more flexible than a corporation, and the pass-through model provides an owner with more privacy, especially if you have or plan yo have more than 100 shareholders, or shareholders that are corporations.

If you were to form a corporation, a C Corp has to pay taxes twice: once for the business, and once for the individual, and S Corps are subject to the management restrictions. Again, an LLC avoids these, giving members more freedom. And really, that's why you got into freelancing in the first place, right?

Ultimately, the choice is yours whether or not you want to take the plunge and form an LLC. I recommend it for purposes of personal liability and privacy, not to mention the tax benefits as your income grows. Remember, always keep your documents updated with your state, and be sure to check the requirements of your state before paying your registration fee online or in person. Here's to you and your growing freelance potential!

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