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Does a freelance business need an LLC? - Business entities for freelancers

There is a natural institutional predisposition for enterprises not to engage with individuals.

June 27, 2022

The business context of doing business.

Do you need a limited liability company (LLC) to freelance?

No, you don't need an LLC to freelance; if you don't formally organize your freelancing business, you will most likely be a sole proprietor.

People are increasingly trending towards working as digital nomads, traveling as they work, and managing their freelance business as flexible but efficient as possible, so an LLC can be helpful.

Improve your professional image and quickly establish business credibility

Suppose you, like much of the talent pool, have opted to scale a freelance business, sourcing your own small business clients. In that case, you know how many organizations have made it clear through their practices that they prefer working with other organizations.

There is a natural institutional predisposition for enterprises not to engage with individuals. Generally speaking, larger institutional organizations don't prioritize working with individuals, which can be a roadblock in your freelance business.

It helps to have an LLC or a corporate structure, business name, and process for conducting business when trying to win corporate clients. Enterprises like engaging other organizations; therefore, the more freelancers behave like organizations, the better.

How to be taken seriously as a freelancer

According to Forbes, freelancers make up 50% of all the workforce talent, stating that "the majority of U.S. workers will be freelancing by 2027." So, if you can leg up a professional edge, do so now.

A business license allows you to dispel demographic biases to win more clients because it's an entity, not a person conducting the freelance work.

Although we all strive to put personal preferences aside, sometimes biases shine through. Business licenses can bridge generational gaps, quash assumptions, and allow you to pitch your experience, portfolio, and skills to your clients. Becoming more professional with your business setup ensures that your ability to scale is in grasp.  

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Worksome is one of those tools that allows you to access nearly 1500 clients and is growing worldwide. With clients across the globe, we showcase your profile to clients in need of your skills and services, and what's even better, Worksome doesn't take any fees from your profits.

Using Worksome can help establish you as a professional because it gives your client the management tools they need to quickly and compliantly hire you, track your progress, and stay on top of billing.

Types of business licenses, everything you need to know

There are several business licenses to choose from, so discuss your options with an attorney.

A sole proprietorship is one of the most basic options for freelancers and ends up being the default status for most businesses without formal registration. In this arrangement, there is no legal separation between the person running the company and the business itself, so you take on all liabilities.

With a sole proprietorship, you can set up a doing-business-as (DBA) so that your business can operate under a different name than your own, but this does not change the legal status of your business. Partnerships often fall under this category because it's two people in business together as sole proprietors.

C-corporations and S-corporations are generally subject to double taxation, meaning corporations pay income tax on their earnings, and corporate employees pay income tax on their wages. The letters C, and S, refer to the subchapter of the tax code that details them, but there are some differences to note. Both C-corps and S-corps require filing articles of incorporation with the Secretary of State, which involves a nominal fee.

Corporations are owned by shareholders with a predetermined number of shares. The corporation can own property in its name and take on debt. Still, it must make regular disclosures to relevant governing bodies, hold shareholder meetings, elections for board members, officers, etcetera. The courts can rule to dissolve this business type if regulations are ignored.

S-corporations are intended more for small businesses because they can be designated as pass-through-entities, meaning incomes and wages can still be accounted for as personal income, making it a little easier to navigate. However, S-corps must also go through all the regulatory shareholder meetings, and extensive paperwork, just like C-corps.

Why do people choose LLCs? The best business entities for freelancers

As a freelancer running a business, having an LLC protects you and your personal assets from unforeseen risks. An LLC serves as a middle ground between a corporation and a sole proprietorship/partnership. It allows you to keep your personal wealth and assets protected, making it an attractive option.

Income earned through an LLC can be claimed on an individual's income taxes, which helps keep your tax rate low and reduces the paperwork you need to file with the Internal Revenue Service (IRS).

After forming your LLC, you'll receive a tax employee identification number (EIN), which establishes your business as a legal entity separate from your identity as an individual.

Now, your business can get its own bank account and build business credit under the business's name. Getting a business bank account and establishing business credit can make it easier to track your business income and expenses and accurately report with ease around tax season - Not to mention the newfound eligibility for business funding.

LLCs Offer Flexible Tax Benefits

Initially setting up your LLC, you will elect for pass-through taxation or corporate taxation.

LLCs allow you to mix corporate and pass-through tax structures to take advantage of perks from both models. In pass-through taxation, the business itself won't pay any taxes. Instead, the taxes are "passed through" to you as the business owner and paid on your personal tax return.

If you elect to be taxed as a corporation, also known as double taxation, your freelance business will pay the corporate tax rate. You will also personally pay taxes on any wages or distributions made to you as an LLC employee and or owner.

As with any good thing, there are some traps to be aware of, so while LLC rules are generally broad and flexible, the IRS does require that you report correctly. To pay your taxes accordingly, seek expert advice from your accountant or tax attorney.

Legal things freelancers need to consider: Going from employee to business owner

Disclaimer: This is not legal advice, and you should consult your attorney before making any legal decisions.

There are three legal things you should consider:

  • Personal liability

When you are a freelancer without the protection of an LLC, you are the brand, the product, and the business, which means you are at risk without legal business protection.

  • Tax exposure

The government will always come after you for their share of income in the form of taxes. Tax exposure is one of the biggest shocks to those who jump from employee to full-time freelancer. When you are an employee, your employer pays your taxes, but you are solely responsible when you start running your business. Some taxes you'll need to account for are state income taxes, federal taxes, and other self-employment taxes.

  • Contracts

Familiarizing yourself with contractual provisions before moving to freelance can help prevent conflicts and legal trouble. Contracts between your freelancing business and your freelance clients should provide certainty around payment, ownership, responsibilities, and restrictions.

As a professional freelancer, Worksome supports you in ensuring contracts are always legal and the terms of your working relationship are established and straightforward for you and your clients. Most importantly, payments are always on time, and prompt payment from your clients is crucial to any sustainable freelance business.

Creating your own business is a rewarding opportunity to achieve work-life balance and freedom, so be sure to sign up for Worksome to start connecting with clients worldwide who are ready to hire your gifts, talents, and services.

For more information about starting and scaling your freelance business, read "How to turn freelancing into a lucrative, long-term business: tools for success."

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