What Freelancers Should Know About LLCs

Freelancers don’t have to create an LLC for their business, but there are many reasons they should consider doing so. In this guide, I’ll cover five key reasons why forming an LLC can benefit freelancers in Kansas City, Boulder, and beyond.

1. Limited Liability

As the name suggests, a Limited Liability Company (LLC) creates limited liability for its owners. This means the owners are not personally liable for the debts and liabilities of the small business. For example, if you sign a lease agreement on behalf of the LLC and default on the lease, the landlord can take action against the LLC, but they won’t be able to go after your personal assets, like your home (unless you signed a personal guarantee or are subject to liability due to veil piercing).

However, keep in mind that you’ll always be liable for your own negligent or harmful 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.

2. Tax Benefits

If you operate your freelance business as a sole proprietor, the IRS sees no distinction between you and your business. The same is true for single-member LLCs that don’t elect a different tax status. In both cases, you’ll attach a Schedule C to your personal tax return at the end of the year.

However, forming an LLC gives you the option to elect S-Corp tax status. All income, losses, and other tax items still pass through to your personal tax return, but you might be able to reduce your tax bill if your financial situation meets certain criteria. Speak to an accountant to see if an S-Corp election could benefit you.

3. Help Your Clients

Businesses (like your clients) want to avoid having the IRS reclassify their independent contractors as employees. Operating through an LLC can help reduce the risk of this reclassification, especially if you make an S-Corp election. The IRS is less likely to reclassify a freelancer working through an LLC compared to a freelancer operating as a sole proprietor. This structure makes your clients more comfortable hiring you as an independent contractor.

4. Professional Perception

Sometimes you’ll want to present yourself as a small, personal business, but other times you may want to win over large corporate clients. In those scenarios, operating as an LLC can make your business appear more official and credible. For example, when a contact at a large business submits your invoice for approval, “Kansas City Art Shop, LLC” or “Boulder Creative Services, LLC” sounds much more professional than just “Jane Doe.” This perception of professionalism can help you secure bigger projects and establish trust.

5. Future Growth

Always consider your future growth when deciding how to structure your freelance business, especially if you think it might evolve into a high-growth startup in Colorado, Kansas, or Missouri. If you have plans to add owners, raise investment, or eventually sell your business, using an LLC or a similar business structure will make those goals easier to achieve. An LLC provides the foundation needed to grow, bring on partners, and secure outside funding.

(This article is general in nature and is not legal advice.)