Freelance business is often treated as a glorified side hustle. Even for those who rely on it as a primary means of income, it is almost designed to feel like something other than a “normal job.” The hours and workload can be sporadic, there is no direct oversight, and there’s really nothing official about it unless you make it so. Because of all this, a lot of people set about doing freelance work more like a never-ending series of side projects than anything else.
This is legal and manageable and can be perfectly profitably done well. At the same time though, if you rely heavily on your freelance work, there is also a lot to be said for setting up a business — and specifically an LLC.
What is an LLC?
As you may well know, the abbreviation LLC stands for “limited liability company.” Alongside sole proprietorships, partnerships, and multiple types of corporations, it is one of the most popular official structures for new and small businesses today. And its primary function is to free a business owner of various potential liabilities.
ZenBusiness details how an LLC manages this specifically, as well as what it really means. To summarize, an LLC is formed as a means of turning a business into its own entity, separate from its owner. What this means with regard to potential liabilities (such as business-related debt or legal issues) is that the owner’s personal assets are not exposed. By turning your freelance business into a formal LLC, in other words, you ensure that should your company need to manage a legal case or pay off debts, your personal assets cannot be collected for those purposes against your will.
Why an LLC is Good for Freelancers
LLCs are extremely popular business structures, whether for freelancers looking to make things more official or even for large companies just starting out. But there are a few reasons this structure can be particularly beneficial to a freelancer:
Affordability – Starting a business can be expensive for any number of different reasons, and often enough, freelancers don’t have that much capital to spare early in the process. But the formal setup process for an LLC can actually be extremely cheap. Per the Houston Chronicle, the fees associated with registration are as low as $50 in some states, and the forms can be completed by the owner (as opposed to requiring the pricey help of legal experts).
Protection – Protection is something we got into above in defining LLCs. But just to reiterate, forming an LLC guards you against potentially serious financial issues relating to your company. We should also add that it protects you against double taxation too. LLC owners can simply add business profits to personal income taxes, whereas some other structures require that business income and personal earnings be taxed separately.
Legitimacy – Legitimacy is also a huge perk for a freelancer who sets up an LLC. According to a report written by CNBC, only 36% of small business owners use contract workers. There are a lot of reasons for this, but one is that there are fears about the legitimacy of private contractors. By establishing yourself as an LLC though, you immediately give the impression that you’re offering professional services, rather than freelance assistance. Many businesses and private clients alike will feel more comfortable doing business with you as a result.
Additional Perks in the Time of COVID-19
As a final note, you may also want to consider turning your freelance operation into an LLC specifically in light of COVID-19 and its effects on the economy. In our ‘Freelancer’s Guide to Managing Job Uncertainty During the Coronavirus’ we mentioned the idea of keeping an eye out for relief funds. More of these could be coming throughout much or all of 2021, and yet some of them are likely to be designated for small businesses, rather than independent contractors. Being able to apply for financial relief as an officially registered LLC might just help you to weather the storm more effectively.