Around 46.5% of the total global workforce is self-employed.
This means about half the population in the worldwide workforce is an entrepreneur. While employees are now ditching the traditional 9-5 corporate mindset and moving toward freelancing, learning how to protect your assets from legal liability is essential.
As freelancers, you must be curious about ways to protect your personal assets. To satiate your curiosity about whether to legally establish a business entity such as an LLC or work as a sole proprietor, read on. This article talks all about it and more. However, before directly jumping into it, let’s first understand what LLC is.
If you’re new to freelancing, you may need to learn what an LLC is and how to set up an LLC for your business.
LLC, short for “Limited Liability Company,” is a legal entity formulated under the laws governing that particular state. Plus, they’re the least complex business structure apart from sole proprietorships.
So when you form an LLC, you’re no longer considered the owner of your business but rather a member of the LLC. However, this doesn’t mean you don’t own your business. You simply have a legal bifurcation between your personal and business financial assets. There are numerous advantages of incorporating a business. Let’s take a look at a few of them.
Incorporating a business means making your business a distinct identity to form a company. It changes ownership so that the business remains separate from its shareholders and is no longer a sole proprietorship. So when you incorporate your business, you’re essentially registered and recognized by the government.
The primary advantages of incorporating a business include transferable shares and limited liability. However, there are many more:
- It enables you to protect your assets from beneficiaries
- You gain tax benefits
- It protects your assets from potential lawsuits
- It protects your brand identity
- It builds a better reputation
- It’s easier to transfer business
- It lets you grow your business even after you leave
So if you intend to scale your business in the future or delegate it to someone else, incorporating it becomes a must. Let us now take a detailed look at the benefits of creating an LLC for your business.
Another benefit of incorporating your business, and one of the most crucial to leverage, is the many tax deductions available to incorporated companies. When you go from being a sole proprietor to a business structure such as an LLC, numerous deductions at your disposal are not available to individuals. Specifically, you may see tax benefits such as:
- The ability to spread out your losses over a more considerable period
- The ability to deduct startup and operational expenses
- The ability to remove employee benefits
- You may be able to leverage capital gains exemptions when selling the shares or existing the business.
- You can retain and reinvest the profit in the business without suffering immediate tax consequences.
- You can distribute income among shareholders and help lower the overall tax liability.
Your local and state taxing authorities may offer incentives to you more readily if you are a corporation. Businesses with multiple locations will benefit significantly from tax deductions because taxes generally become more complicated as your business grows. In such cases, opting for a solution such as Toku helps. It calculates the tax withholding processes and pays remittances of token income on time, eventually improving efficiency.
However, remember that tax laws are complex, and it’s best to consult a certified accountant before claiming any deductions.
As stated earlier, it’s not mandatory for you to form an LLC as a freelancer. You’re free to choose to be a sole proprietor. However, this might not be in your business’ best interest as you won’t be able to meet your overall business and financial needs.
For example, if you don’t choose to create an LLC, you can’t get a business bank account. Any and all income earned goes into your personal bank account and you won’t be able to build business credit since you don’t have an actual legal entity for your business. You also won’t be able to protect your assets from lawsuits since you won’t have a different business account.
Few key reasons why you should have a separate business account are as mentioned below:
- Ensures legal compliance and makes financial reporting, tax filing and other record-keeping more streamlined.
- It automatically increases the credibility of your business and fosters confidence among your partners or customers.
- Ease in tracking all financial records such as income and expenditure, improving your business’ overall financial health.
- Enables you to attract more investors given the business is a legitimate registered company and not just a freelance gig.
If you feel confused as to whether to create an LLC for your business or not, it’s always wise to take opinions from fellow freelancers or accountants.
Fearing the paperwork and cost, you may deter from making your freelance business more legitimate.
However, establishing and maintaining an LLC is much easier than setting up a corporation. You simply need to submit the articles of organization to the state government, and while the fees vary from state to state, it is usually minimal.
Also, for an LLC business, you don’t need to appoint board officer positions or conduct quarterly or yearly audits, mission, values, etc. To maintain your LLC, you should meet your state’s requirements and tax policies. To dig a little deeper, below are a few more benefits:
- LLC formation requirements are more flexible than those of corporations since the documentation and paperwork needed are minimal.
- Traditional corporations have a management structure comprising board members, managers, etc., while the management of an LLC is more flexible.
- LLCs are not liable to fulfill big administrative requirements and aren’t subject to costly corporate regulations and formalities.
- LLCs can be managed by owners themselves or they can appoint managers for everyday operations which simplifies decision-making processes.
Long story short, it is simpler to opt for LLCs than setting up an organization technically and financially.
LLCs offer a promising potential for partnerships due to their convenient and flexible nature. When considering merging freelance operations with another individual or entity, forming an LLC can provide a solid foundation for collaboration, especially when supported by a robust LLC operating agreement.
One key advantage of LLCs is their flexibility in ownership structures. They enable the formation of partnerships with ease, as LLCs can have multiple owners known as members. These members can be individuals, other LLCs, corporations, or partnerships. This flexibility allows diverse parties to come together and establish a partnership within the structured framework of an LLC.
Plus, LLCs promote shared management and decision-making. They provide a platform for partners to jointly oversee and make crucial business decisions. Partners within an LLC can establish an agreement that outlines their respective roles, responsibilities, profit sharing arrangements, and decision-making authority. This collaborative approach ensures that all partners have a voice in the operation and direction of the business, fostering a sense of collective ownership and accountability.
By leveraging the benefits of LLCs, individuals and entities can enter into partnerships with confidence, knowing that they have a legal structure that supports their collaboration. The flexibility of ownership and the ability to establish clear guidelines for management and decision-making make LLCs an ideal choice for those seeking to partner up and create a strong foundation for their joint business endeavors.
Hopefully, the blog answers your questions about why you should create an LLC for your business.
As a freelancer, it’s one of the most important things to do since it protects you financially and legally. If you’re new to freelancing, creating an LLC from the get-go will save you much time. If you’ve been in the market for a long and haven’t made an LLC, take this article as your cue to at least begin thinking about taking this step.
While there are a few requirements that you need to meet to ensure you get the best protection from your LLC, they need to be more balanced compared to their benefits.
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Parita Pandya is an Engineer turned Writer. She usually finds herself writing for businesses. When she is not writing, she is either strumming her guitar or penning her thoughts down on paritapandya.com.
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