What Freelancers Need to Know About LLCs

Kansas City freelancers don’t have to create an LLC for their business, but there are many reasons they should consider doing so. We’ll look at five of those reasons in this post.

Limited Liability

As the name suggests, a “Limited Liability” Company creates limited liability for its owners – this means the owners are not liable for the debts and liabilities of the small business operation. For example, if you sign a lease agreement on behalf of the LLC and you default under the lease, the landlord can probably win a judgment against the LLC and use the law to force the LLC to pay the landlord. But that judgment won’t allow them to get access to your personal assets or place a lien on your home.

However, don’t forget that you’ll always be liable for your own negligent and bad actions. For example, if you cause a car accident while delivering artwork to a client, you will still be personally liable for the damage (that’s where insurance comes in).

Taxation

If you operate your freelance business as a sole proprietor, then the IRS will not make any distinction between you or your business. The same is true for single-member LLCs that don’t make any alternative tax election. In both cases, all you have to do at the end of the year is attach a Schedule C to your personal tax return.

However, if you form a LLC you can elect to be taxed as a S-Corporation. All income, losses, etc., still “pass through” to your personal tax return, but you may be able to reduce your tax bill if your financial situation meets certain criteria. You should speak to an accountant about whether you can benefit from a S-Corp election.

Help Your Clients

The last thing a business wants is for the IRS to reclassify their independent contractors as employees. And one way you can help them avoid a reclassification for you is by operating as a LLC. That’s because the IRS is less likely to reclassify a freelancer working through a LLC than they are to reclassify a freelancer were working as a sole proprietor. (Read more: Employees v. Contractors)

Perception

Sometimes you’ll want to maintain a perception as a small mom and pop business but other times you might want to win large businesses as clients. In those scenarios, it is a good idea to operate your business as a LLC because it can create the perception that you are more official than just a single-person shop. And when your contact at the large business is submitting your invoice for approval, “Kansas City Art Shop, LLC” sounds a lot better than “Jane Doe.”

Future Growth

Last, you should always consider your future growth when deciding how to run your freelance business (especially if you think your freelance business might later develop into a high-growth Kansas City startup). If you have aspirations of adding owners, raising professional investment money, or selling your business, you should definitely use a LLC or similar structure to help you accomplish those goals later.

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Image: Adobe/GaudiLab

*This article is very general in nature and does not constitute legal advice.