The newly-passed Republican tax bill is expected to increase the number of freelance workers and independent contractors in the coming months and years.
But there’s more to freelancing than hanging out a shingle and announcing you’re open for business. There are tax implications, too.
One way to protect yourself from the tax bill fallout is to form a limited liability company to shield your income.
The New York Times recently provided an example: “Our colleague Neil Irwin, who writes on economics and business, is paid as an employee of The New York Times. But under the Senate tax bill, he’d be much better off turning himself into a business and collecting the equivalent of his earnings and benefits as payments to a hypothetical new company, Irwin Scribblings, LLC.”
Freelancers have enough on their minds trying to find clients, invoice customers, collect payments and do the work they were hired to do. Who’s got time to worry about forming an official company with the state for legal protection?
If you’re a savvy freelancer, you should probably make the time.
You put your heart and soul into building your freelance business. Why not spend a few hours setting up a limited liability company to protect yourself — and your assets — in case you wind up in court?
What’s a Limited Liability Company?
A limited liability company, or LLC, is a business structure that protects your home, car and other personal assets in the event of a lawsuit related to your freelance work.
No one plans to go bankrupt or get tangled up in a lawsuit, but if it happens, an LLC also limits your potential loss of personal possessions and bank accounts.
“Granted, this is not absolute. If you are grossly negligent, engage in a fraud or commit a crime, then you will likely not get limited liability protection,” notes Tom Taulli, founder of Pathway Tax.
LLCs may also provide some welcome tax benefits. In some cases, they may allow your profits to be taxed at a lower tax bracket.
LLCs can even have a positive impact on your personal taxes.
“By setting up an LLC, you… avoid paying both personal and business taxes on your freelance income,” explains New York-based CPA Jonathan Medows.
It’s important to note that even though you won’t pay corporate taxes on your business profits as an LLC, you’ll still have to pay self-employment contributions to Medicare and Social Security.
With the exception of a few businesses like banks and insurance companies, just about any business can become an LLC.
To find out if your business meets the criteria, Google “limited liability company” and the name of your state for more information.
How to Set Up a Limited Liability Company
Forming an LLC is usually just a matter of filling out a few forms and paying a filing fee. Here’s how to get started.
1. Choose a Name for Your Business
Before you get started on the paperwork, decide on a legal name for your company.
There are a number of things to consider when naming your business, including whether it’s memorable, reflects your brand and meets the naming rules of your state. Be sure to also make sure no one else is already using the name you have in mind.
“Good LLC names are worth their weight in gold. Choosing the right LLC name for your business is an important part of the startup process. Your future LLC name not only works to identify your company; it’s also the name on which you’ll be building your brand,” says LegalZoom’s Belle Wong.
2. Complete the Paperwork
Check Nolo’s “50-State Guide to Forming a Professional LLC” for links to your state’s LLC documents and other LLC resources.
You can download the forms you need and fill them out manually or, in most states, simply complete your application online.
To get the process underway, fill out the Articles of Organization form. You’ll need to include your business name, business address, and other basic information about your business.
In some states — like Florida, for instance — that’s all there is to it, while others may require additional documentation like copies of any business or professional licenses before your application is processed.
Instructions on how to fill out the form are included with all LLC forms and paperwork, but if you have any questions it’s wise to contact a tax professional for help.
3. Choose a Registered Agent if Required
Most states require LLC applicants to name a registered agent — someone who agrees to accept legal paperwork on behalf of your business.
You can act as your own registered agent, appoint a friend or relative or hire a registered agent to act on your behalf.
4. Consider Preparing an Operating Agreement
Though not required in every state, it may be worth it to draw up an operating agreement anyway.
“An operating agreement will help you guard your limited liability status, head off financial and management misunderstandings, and make sure your business is governed by your own rules — not default rules created by your state,” explains Nolo’s Beth Laurence.
5. Pay the Fee
The final step toward becoming an LLC is to pay the filing fee required by your state.
Fees vary by state; they’re generally around $100 but can run as high as $800 in fees and annual taxes.
Whether or not to form an LLC is a personal decision that depends on a number of factors unique to each business. It’s worth considering, though, for its added protection and peace of mind.
Lisa McGreevy is a staff writer at Codetic. She likes bringing you this information, but she is not a tax preparer, and this is not legal tax advice.