One common question freelancers ask is which entity formation they should incorporate as for their business. There are several options available. Some include corporations, partnerships, and nonprofits. One popular option is to incorporate as a limited liability company (LLC).
Are you a freelancer ready to take your business to the next level? You may choose to form an LLC.
Why Incorporate a Business?
Before we can dive into an LLC’s benefits, it’s a good idea to understand the reason why a freelancer would decide to incorporate their business.
General, most startups start off as a sole proprietorship. This is a default, unincorporated entity formation. It allows the owner of the business to exercise complete control over the company. They are responsible for everything which impacts the business, good and bad.
Sometimes, however, sole proprietors may find it’s difficult to navigate bad scenarios in business. For example, if the business is struggling to repay its debt there may be more at stake than its professional assets. The lawsuit may impact their personal belongings, like houses and cars.
Almost all entity formations, including LLCs, provide business owners with limited liability protection. This designates the business as a separate, legal entity and prevents the owner from being held personally responsible for debts and liabilities.
If you do not decide to incorporate your business, you’ll be able to remain a sole proprietor. However, freelancers which need extra protection with their business may incorporate as an LLC.
Aside from liability protection, here are a few more advantages freelancers receive from this entity.
Ease in Tax Obligations
Forming an LLC can provide several tax benefits to freelancers. This is especially true for those who were previously operating under as a sole proprietorship.
The business is not a separate entity in a sole proprietorship. Therefore, sole proprietors are taxed on personal and business taxes. They are also responsible for paying self-employment taxes which covers Social Security and Medicare obligations.
This much tax responsibility can often be financially daunting for sole proprietors. Choosing to form an LLC makes it a bit easier to handle tax obligations.
An LLC has the flexibility to be taxed as a corporation, S Corporation, or C Corporation. Typically, many LLCs will elect to be taxed as an S Corp. Both entities have a pass-through entity status which allows for pass-through taxation. This means the profits of the business pass-through to the owners (or members). They are not reported at the business level. The members report profits and losses on their individual tax returns and avoid double taxation.
Choices of LLC Structures
Did you know you can run an LLC as a specific structure type? There are three LLC structures which meet the needs of owners running the LLC.
Single Member LLC
This structure is a good fit if the LLC has only one member, or owner.
Member Managed LLC
Does your LLC have several members? If so, you may decide to form a member managed LLC. This structure allows the members to share the same amount of responsibility in running and operating the company.
Manager Managed LLC
Some LLC members need extra help to run the business. This type of LLC structure allows you to appoint a board of managers to oversee the LLC’s direction and operation rather than its members.
LLCs provide tax designation flexibility to freelancers. They’re also a generally flexible entity for maintaining a business.
Fewer formalities and compliance requirements are necessary with an LLC. It’s also fairly easy to set up the entity and file its paperwork.
Work With a Professional To Form an LLC
If you’re a freelancer who still has questions about forming an LLC, it’s a good idea to meet with trustworthy tax professional who can answer these questions.
Once you know an LLC is the right fit for your freelance business, reach out to MyCorporation. We’ll be able to assist you in the filing process to form an LLC and incorporate the business.
Form an LLC with MyCorporation. Contact MyCorporation at mycorporation.com or give us a call at 877-692-6772.