Sole Proprietorship Vs Llc

should a freelancer form an llc

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.

Liability protection.The big draw of LLCs is that they’re treated as separate legal entities. In other words, they can shield you, the individual owner, from many types of liability issues. LLCs can also shield you from some legal claims against your business—though you should be aware that this protection is not complete, and you can be held personally liable in many contexts. For many freelancers, an LLC won’t provide any tangible tax benefits. Most deductions that can be taken by a single-member LLC can also be taken by a sole proprietor (e.g. a freelancer without an LLC or any other corporate entity). So you shouldn’t expect to see immediate tax savings from forming an LLC.

  • Creating, signing, and sending contracts has never been easier.
  • For most people, this is the most important reason to form an LLC.
  • For an LLC, you only need to file a typical Schedule C with your 1040 tax return.
  • If you do it right, an LLC should provide some level of benefit.
  • If you think this makes sense for your business, you should take the leap.

To ensure that you are taking the necessary steps to pay taxes accordingly, I will teach you how to start an LLC. If you have a physical address where you’re regularly available during business hours, you can act as your own registered agent.

Do I Need An Llc If I Am A Sole Proprietor?

You may also find new opportunities with suppliers, which can lower your costs and improve your service. Filing as a C-Corp means your LLC would be taxed as a corporation, something leading to bigger taxes. Filing as an S-Corp allows you to save money on Social Security and Medicare as just two benefits. An S-Corp is also still essentially an LLC, except you’re declaring how you want to be taxed. In many ways, being an LLC is an easier way to manage your business because you don’t have as many tax reporting requirements. You only have to file a personal return, hence why so many small businesses prefer to be LLCs.

  • Investors typically don’t want to take on personal liability with their investment.
  • This article is not intended to be legal, financial, or tax advice.
  • It means that the default tax status of an LLC with one owner is the same as a sole proprietorship, while the default tax status of an LLC with more than one owner is the same as a partnership.
  • It’s easy to rationalize spending hours picking a business entity, changing your company name, designing a logo, tweaking your website, and so on, but none of this stuff is going to make you money.
  • If you plan to expand your scope in the future, pick a name that’ll accommodate this growth.

In both cases, all you have to do at the end of the year is attach a Schedule C to your personal tax return. As the name suggests, a “Limited Liability” Company creates limited liability for its owners – this means the owners are not liable for the debts and liabilities of the small business operation.

Step 3: Choose An Llc Registered Agent

As a sole proprietor, you are your business, and you can’t sell yourself in a literal sense, so in order to sell your business, you would have to painstakingly define whatever it is you are selling. If your business is an LLC, however, it is usually more clear what belongs to you and what belongs to the business. That can make it easier to sell the entire business in one fell swoop.

  • It affirms that you are taking the necessary steps to improve your business, pay your taxes, and protect your assets.
  • However, an S corporation is considered a pass-through entity for tax purposes, which means the profits and losses are divided among the shareholders.
  • That can make it easier to sell the entire business in one fell swoop.
  • Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email.
  • By default, single-member LLCs are taxed as disregarded entities , and multi-member LLCs are taxed as partnerships.
  • Typically, a court of law won’t enforce an oral agreement in any of these circumstances under the statute.

When it comes to taxes, you receive 1099s from your clients, and itemize any freelance business-related deductions using what’s called a “Schedule C” in IRS-lingo. The best benefit of an LLC over a sole proprietorship is that the LLC can shelter you from liability. Let’s say in the worst-case scenario, you are sued, then the potential plaintiff could only sue the LLC and not you personally. Therefore, if the plaintiff wins the lawsuit, they would receive assets of the LLC and not your personal assets. The majority of freelancers don’t need that hedge and remain a sole proprietorship for decades without needing to form an LLC or corporation. 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.

Lack Of Personal Protection

As a sole proprietor, you may be able to give your business a different name for marketing purposes, known as “doing business as” or DBA. A freelancer may want to raise money from investors or bring in a co-owner. If you were to enter into a verbal contract, it’s recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

should a freelancer form an llc

Registering as some business entities may provide additional legal and financial protection for its owners. You’ve probably heard a lot about new tax breaks and deductions business owners are eligible for this year, thanks to tax reform, officially known as the Tax Cuts & Job Act of 2017. Under the new law, all business owners are allowed to deduct 20% of their pre-tax income, as long as they make less than $157,000 per year. Forming a sole proprietorship is rather easy, as there isn’t much paperwork involved. Depending on the work that you are doing, you may need to get some permits, licenses, zoning clearance, and some other extra documents – but this is not the case for every business. If you are only running an online business (i.e., content marketing), then you won’t need as much paperwork done. LLCs are pretty advantageous for business owners who want to take it a step up.

Other Llc Considerations

If your business continues to grow, you may just need additional help down the road. Flexibility – Allows greater flexibility for customizing the structure of the business.

While it may not be required, it’s good practice for partners to have a written agreement that outlines each individual’s roles, responsibilities, and the division of profits and losses . When considering the different types of entity options for freelance businesses, it’s crucial to weigh the pros and cons to determine what’s best for an individual business’s situation.

If you are a single-member LLC owner, then you may automatically be taxed as a sole proprietor. However, if you have employees, you can choose if you want to be taxed as a corporation (whether it’s C-corporation or S-corporation, it does not matter). By setting up an LLC, you also avoid paying both personal and business taxes on your freelance income. As a “pass-through entity” all the income and expenses from your LLC get reported on your personal income tax return as the business operator. Another major reason you should consider forming an LLC is that it can help you separate your personal and professional finances.

What Is The Ab5 Freelancer Law? And What Does It Have To With Starting An Llc?

For instance, if you start giving music lessons out of your house, boom, you’re no longer just Jane Smith, the individual—you’re Jane Smith, the sole proprietorship. After forming an LLC for your business, you’ll be able to build your company’s credit separate from your own. Building business credit is essential if you want to eventually avoid having to submit your personal credit history or put up personal guarantees for business loans or similar applications. However, in certain cases, an LLC can confer benefits because it allows its owners to choose how the entity should be taxed.

should a freelancer form an llc

It depends on a few things, like how much money you make, if you have partners, what you plan to do with the business in the future (e.g. raising VC money), etc. The Braintrust Token is an ERC-20 token issued on the Ethereum blockchain network by the Braintrust Technology Foundation, a nonprofit foundation. Braintrust Tokens are currently anticipated to be publicly released later this should a freelancer form an llc year. Businesses are hiring your company to do work, rather than an individual — even if that company is just you. By forming an LLC, you can often remove the compliance question from the equation. This has extra value for top companies, who face additional scrutiny when hiring independent contractors for work relationships that may be construed as more similar to that of an employee.

For tax purposes, single-member LLCs are treated the same as a sole proprietorship, while multiple-member LLCs are treated as a partnership. As you learn about forming an LLC, you’ll probably come across information about S corporations and C corporations, commonly referred to as S corps and C corps. An LLC can have an S corp or C corp status, which is a type of tax classification. Although single-member LLCs are, by default, taxed in the same way as a sole proprietorship, an LLC can also choose to be taxed as a C corporation. Your business classification affects more than just how you file your taxes. Many freelancers provide services under their personal name and operate outside of a legal entity.

Now That You Know How To Start An Llc, You Can Grow Your Business Further!

Company, he has to take home 75% of the income- at least in the eyes of the government. Update your state with any business changes that may happen in the course of time. Once you create an LLC, you should be aware that there are certain things you need to do to maintain your new corporation.

The take-away here is that you know an LLC has options as it relates to taxation. Because every tax situation is unique, you should speak to your tax advisor before moving forward with a S-corporation tax election. Hiring a registered agent service offers a number of benefits, including privacy and peace of mind. However, you’ll also need to adopt written bylaws and hold an organizational meeting, and you’ll be required to have annual directors meetings. Operating agreement, which outlines how the business will be governed, is recommended. Without this agreement, your state’s default laws about LLCs will apply.


If a freelancer doesn’t have the proper business entity protections, they could lose their car, house, and personal assets due to their business’s legal or financial liabilities. And while your business entity is definitely important, don’t let yourself get bogged down. You could read about the benefits and drawbacks of different business structures forever, but the reality is that as a freelancer, your time is literally your money.

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