Why you need an LLC

Liability Protection

If you’re freelancing and don’t have an LLC, you should consider setting one up as soon as possible. If you're operating as a sole proprietor (what happens by default if you're doing business under your name), you don't have any protection from liability. This means that someone can sue you and come after your personal assets.

Tax Benefits

By operating as an LLC, it's easier to separate business and personal expenses. This is helpful at tax time for making sure you're not missing out on deductions. If you're making six figures or more, it may be beneficial to file IRS form 2553 which treats your LLC as an S-Corp for tax purposes. I've saved about $50,000 in taxes since doing this a few years ago. Some people refer to this as the S-Corp loophole, but there's nothing particularly shady about it. It's part of the tax-code and plenty of sophisticated business people use this structure. Be sure to talk to your CPA before doing this. It may or may not make sense based on your current situation.

Business Legitimacy

I am much more credible operating as Skyhook, LLC than as Nick Fogle sole proprietor. Operating without a business entity can come across as lacking experience and it looks less professional. Depending on the type of work you're doing, some businesses will only contract with a formal business entity.

How do I create an LLC?

Most states let you submit LLC formation documents electronically. I've written a separate post with links to each state's website (fee information may have changed since I posted this). Pay attention to recurring fees and any special requirements.

If you need help, I recommend consulting a CPA or an attorney for assistance. Many professionals will assist you for a few hundred dollars. It's a small price to pay to make sure your business is set up correctly.

How long will it take to form my LLC?

The paper work can typically be completed within a few hours. If your state allows you to submit the documents electronically, you should know whether your registration is accepted within a few business days. I've seen it happen on the same day. It really just depends on your state. After your business entity is officially registered, you'll be able to view it on the secretary of state's website.

What next?

Separate Bank Account

It's critical that you have a different bank account for your business. If you commingle funds between your personal account and business, you could lose out on liability protection.

Before you can set up a bank account, you need to file for an EIN number. Follow the IRS instructions here. It can take a few days to get your number, and you'll need this before you can open your bank account.

Paying yourself and handling taxes

I use Gusto for handling my payroll and my State and Federal business filings. It's incredibly easy to connect your business bank account, add yourself as an employee, and set salary/ payroll for yourself. I've used it for my single member (just me) LLC for the last 4 years and it's one of the first things I recommend to people who are trying to automate their new business.

Disclaimer

This post is intended for educational purposes only. Nothing on this website should be constituted as legal advice. You should contact your CPA or attorney for specific advice for your situation.