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  • 3 min
  • 03/07/2022

Should I Form an LLC if I’m a Freelancer?

There are many jobs you might take on that can qualify you as a freelancer. This can include side work doing advertising, performing as a musician at parties, selling jewelry on Etsy, driving an Uber, or food shopping for Instacart. Any form of side business that brings in income qualifies you to set up an LLC for your freelancing work. While it’s fairly simple to do, the question is whether it’s worth doing so.

If you are working as a freelancer, you are receiving 1099s from your clients, which means your taxes are not being deducted automatically from your earnings. If you have not formed an LLC this means you are by default, a sole proprietor. Your Social Security Number or Employer Identification Number (EIN) will function as your tax ID. What this means is you need to determine if it’s best for you to function as a sole proprietor or as the owner of an LLC.

In order to determine whether forming an LLC for your freelance work is ideal for your personal situation, read on.

Pros of Forming an LLC as an Independent Contractor

Some pros for forming an LLC include:

  • Having asset and liability protection. Without the protection of LLC if you encounter legal or financial trouble stemming from your work, you face the potential for personal liability which can leave your personal assets vulnerable.
  • Gain tax flexibility. With an LLC you have more control and can choose the tax structure that is most beneficial to your business.
  • It offers room for expansion. Forming an LLC gives you the freedom to hire employees down the line should you decide to expand your business.
  • Gain business credit. By forming an LLC you’ll be able to open a business bank account and build credit as a business owner.

Cons of Forming an LLC as an Independent Contractor

Some cons for forming an LLC may include:

  • Taxes are more complicated. While you might enjoy certain tax benefits by forming an LLC, they are more complex, which can create problems for you if they are not done correctly.
  • You’re required to keep records. While freelancers should keep records as well, failing to maintain records as an LLC could open yourself up to an audit from the IRS.
  • You must keep your accounts separate. When forming an LLC you are required to keep your personal and business accounts separate, otherwise this can cause tax issues.
  • Professional help is recommended. Unlike working as a freelancer, starting an LLC often requires assistance from professionals such as an account and lawyer.

Tax Advantages of Forming an LLC

When properly managed, an LLC may help reduce your tax obligations while also giving you access to certain benefits that would be unavailable to you as a freelancer. Since an LLC offers more flexibility, you can combine various benefits to structure a system that is best suited to your business needs. When setting up your LLC for your freelancing work, you can either choose pass-through taxation (business taxes “pass through” to your personal tax return) or corporate taxation.

If you opt for pass-through taxation, your wages will be taxed as if your business was a partnership. Since LLCs can mix and match tax structures, you can be taxed as either a corporation or a partnership. Depending on other factors this could result in significant tax savings.

Benefits of Doing Business As an LLC

Aside from liability, tax benefits, and business bank account eligibility, LLCs offer a few additional benefits. For example, you may be able to land bigger clients or charge a higher rate as an LLC than would you as a freelancer.

Contact Relevant Today to Form an LLC

If you are a freelancer considering forming an LLC for your business, there may be many benefits for you to do so. Before making the change, it’s best to consult with an experienced attorney and accountant who can help you address your questions and identify potential issues. If you have any questions about business formation, contact our legal team at Relevant Law today.

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