In case you are starting a business as a freelancer, the very first advice that you would get for your business is to set it up as an LLC. Well, the next question that comes up is how would you form an LLC for freelancers? And wait, why are you even doing this exactly?
Well, these questions are very important for those people looking for the steps to form an LLC for freelancers and who is getting into solopreneurship for the first time. Moreover, you should not feel shy to ask these questions and get the answers. A lot of the other freelancers are also in the same place as you.
Even though it is easy to set up a business as an LLC, it is vital to know all the steps to form an LLC for freelancers. The first reason why you need to know about it is since you might not know all the steps. Moreover, the process is more than just a simple filing of a form and then making the payment of the setup fee.
Almost all the states in the US have a specific maintenance requirement that has to be taken care of annually for letting your business run smoothly to keep your LLC active. As a matter of fact, there are a lot of potential deadfalls in case an LLC is not established in the right way or maintained correctly.
Here you would learn all about the LLC from what it is, what it is not along with the steps to form an LLC for freelancers.
What is an LLC?
Before you can master the steps to form an LLC for freelancers, it is vital to know what an LLC is, which is the short form of limited liability company. An LLC is a discrete legal entity that is formed at the state level, under the state laws. Other than this, the LLCs are also the least complicated business structure, excluding the sole proprietorships.
Furthermore, the moment you create the LLC, you would become a member of the LLC and would no longer be the “owner.” Even though this doesn’t change the fact that you are the owner, it is a crucial legal distinction. And this is also one of the reasons why it is an important thing to know the steps to form an LLC for freelancers.
Why is this good?
In many cases, the members of an LLC are not taken as the ones liable for the legal liabilities, losses or debts incurred by the business, and this is the best thing an owner can enjoy. And it is due to these legal protections that many entrepreneurs and freelancers tend to establish their business as an LLC.
And if you (a freelancer) do not set up their company as an LLC and their business experiences financial difficulty, you could easily lose all you have including your savings and personal property in the bankruptcy. Moreover, in case you aren’t providing the services that have a high risk, there are still changes that you could face a lawsuit at some point of the company’s life due to the litigious nature of the business.
But Wait, There’s More
There is another compelling reason why a freelancer should set up an LLC: If your business is an LLC, your business gets the appearance of credibility. Other than this, the company also appears as though it is more established than what it actually is. Moreover, it would be great for you as a freelancer, since it would give you a much better place in the competition.
What an LLC is not!
Well, now you know what the LLC is, but do not mistake to believe that it is a federal tax designation. Although a few states impose the annual tax on LLCs, in most of the cases for a freelancer, your tax designation would be taken as that of an overlooked entity. In short, this means that you would be filing the taxes just like a sole proprietor would.
Before we can move ahead to the steps to form an LLC for freelancers, there is another advantage that an LLC grants you from the tax perspective. You can easily choose to be taxed as a corporation, instead of being taxed as a pass-through just like many other LLCs get taxed. Pass-through means that all your profits from the LLC would be passed through to your personal tax returns.
Nonetheless, this step is not recommended until and unless you are at a significant level of the annual net profits of your business. The best way to deal with this and find out what is the right step for you is to ask the advice of a tax professional.
Now that you understand what an LLC is and what it is not, lets move to the next part before we begin talking about the steps to form an LLC for freelancers.The Main Steps to Form an LLC for Freelancers Click To Tweet
Things to Take Care Of While Establishing an LLC as a Freelancer
As far as we have spoken now, you might have seen all the good about opening an LLC as a freelancer, but that is not all. There are a few drawbacks to it as well, but only if you have not formed and maintained your LLC properly.
Let us Talk Documentation
There are many out there who think that they just need to set up an LLC by filling out one form and then paying the fee for something that is under $100 with the Secretary of State. But this is not all, nor is it the most critical part. Other than this, you would also have to file for the document known as the “Articles of Organization.”
This document is a critical management document, and in a few cases, it works as the factor that helps determine if the members in the LLC are completely protected legally and financially or not. Moreover, the Articles of Organization is not something that can be gotten whenever you want to or just skipped. Hence, it is better not to make the mistake of ignoring it.
As a matter of fact, protection is the reason why you created your LLC, and that is why it is a great idea for understanding all in-depth regarding the LLC with the help of a legal professional. This professional would help ensure that the Articles of Organization is accurate to what you need and your business needs. And this is also one of the steps to form an LLC for freelancers.
Any Other Paperwork?
Yes, and it is the annual report along with the annual filing fee that has to be paid every year. This is important even if your LLC was created to exist in perpetuity, which means that there is no definite time for the duration of the LLC. Moreover, the filing amount due, frequency and the requirements differ for each state. Hence, it is crucial to figure out the governing authority for the LLC in your state. You would need to do a state-level overview for starting to understand the needs.
However, not doing this would render that your LLC is not active. In some states, your LLC would be dissolved entirely if the filing is not made on time. Moreover, to re-activate your LLC is simple where you need to file the desired reports and pay the fees required to reactivate it. But problems can come up if your company was inactive when there was a financial or legal event associated with the business. So, make sure you set a proper reminder.
The Last Financial Note
The last point that you need to keep in your mind is that you need to treat your company as a separate entity, which is also one of the steps to form an LLC for freelancers. For this, you need to just keep the finances of the business and your personal ones separate. Moreover, you would need an expert accountant to keep the records properly to avoid issues.
Other than this, if you are planning to grow your business, you would need a business bank account, and these records would be imperative then. And to make things easier, you can set up an account right now since it doesn’t cost you much. In the end, if you do not keep both personal and business finances, you would end up losing all your personal assets when the company comes up with an issue.
The Main Steps to Form an LLC for Freelancers
Now that you know all the essential things about the LLC, let’s talk about the steps. The steps are straightforward, and it basically involves filing forms and paying the fees, though every state has a different fee structure.
A few states also have requirements that are quirky for the LLC formation like the licenses or extra permits for some services. You would be able to find out what your state requires by getting the help of a professional that can also help in the incorporation process, just like Inc Paradise helps for Delaware & Nevada.
Regardless of where you live and where you want to incorporate your company, here are the three main steps to form an LLC for freelancers:
1. Set up business bank accounts
Almost all the banks need you to set up a new bank account for your business. And even though this seems like an inconvenience, you would be able to protect yourself, if any claim is made against your company. You would need to set up your new bank account with the EIN (explained below) and the LLC’s name. Moreover, to prevent any confusion, check out all information such as what the banks need, etc., before going there.
2. Get an EIN (Employer Identification Number)
It does not matter if you want to hire employees or not, you need to apply for the EIN. And if you are wondering why? Well, you would be able to use the EIN on the W-9s and other required forms, and this would help you to protect your SSN (Social Security Number) from the vendors and clients. On the IRS website, you can file for the EIN and get it immediately.
3. Get insurance
Other than the above steps to form an LLC for freelancers, you need to keep in mind that your LLC is a separate legal entity. So, you would need to get a different insurance for this, even if you had insurance for yourself as a sole practitioner or freelancer.
It’s The Best Choice!
If you set up an LLC as a freelancer, it would be the best decision that you ever made as it would protect you both financially and legally. Although some requirements need to be met, if you keep all on track and place, you will enjoy the benefits perfectly well. If you have decided to incorporate your business, head over to IncParadise and we will help you with opening your company.