Creating a Limited Liability Company (LLC) can be a smart move for freelancers, digital nomads, overemployed individuals, and remote workers. While an LLC is NOT necessary if you’re working a freelance or independent contract role for various clients, it provides a legal structure that offers personal liability protection, flexibility in managing your business, and the ability to scale and add employees or contractors.
In this article, we’ll cover all freelancers, independent contractors, overemployed workers, and remote employees need to know about LLCs, including:
- What Is an LLC?
- Pros and Cons of an LLC for Freelancers, Digital Nomads, Overemployed and Remote Workers
- Should You Choose an LLC?
- How to Register Your LLC
What Is an LLC?
A limited liability company (LLC) is a type of business structure that combines the characteristics of a corporation with those of a sole proprietorship or partnership. As Investopedia states, the LLC structure protects owners from personal responsibility for business debts and liabilities—protection a freelancer doesn’t get with a sole proprietorship. This means the individual can’t be pursued for repayment of the company’s debts.
The limited liability feature of an LLC resembles a corporation, but the taxation process resembles that of a sole proprietorship or partnership. Profits and losses pass through the company to the LLC owners, who report the income on their individual tax returns. So, LLCs don’t technically pay taxes directly (their members do).
LLCs can vary in how they’re regulated from state to state, but they’re a popular business structure across the country because they give you the legal protections of a corporation with the flexibility and simplicity of a sole proprietorship. For freelancers, contractors, digital nomads, and overemployed remote workers, LLCs are a great way to separate work finances from personal finances, as well as give yourself some potentially much-needed legal protection.
Pros and Cons of LLCs for Freelancers, Digital Nomads, Overemployed and Remote Workers
Whether you’re a freelancer at home or a digital nomad abroad, forming an LLC offers distinct advantages you simply don’t get when filing as a sole proprietor or corporation. The main pros of an LLC include:
- You have legal protections similar to a corporation: The LLC shelters you from individual responsibility. Simply put, you are NOT personally liable for the company’s debts. If you have to declare bankruptcy, your personal assets can NOT be pursued by bankruptcy court. If you have an invoice dispute with a supplier or vendor, your personal assets and record are protected.
- You avoid double taxation: Thanks to pass-through taxation, any of the LLC’s profits are simply taxed on your individual income tax return. This avoids double taxation (the company being taxed on profits and then you being taxed on profits/income). For example, corporations get taxed on overall company earnings, then individual shareholders are taxed on profit distributions they receive.
- You have less paperwork and administrative tasks: As a LegalZoom article notes, corporations usually must hold annual shareholder meetings and maintain annual records. They also have way more tax paperwork. LLCs are not required to hold shareholder meetings or keep extensive records.
- You get flexibility and scalability: Did you know Google is an LLC? That just proves the ability of this business structure to fit any sort of company, from one-person ventures to large multinationals. If you plan to grow your business, having an LLC established is a huge benefit and convenience.
LLCs are not a perfect business structure, and do come with some disadvantages if you’re a freelancer, overemployed worker, or digital nomad. The main cons of an LLC include:
- It costs money: You don’t need to register a business with your state if you’re filing as a sole proprietor or partnership. You just have to fill the applicable tax forms, such as a Schedule K-1 (Form 1065) if you’re reporting partnership income. However, an LLC must be registered with your state. The initial fee can be a few hundred dollars, and there may be ongoing annual fees to pay.
- Ownership sales and transfers can be restrictive: In an LLC, members own the business. There must be a provision written into the LLC’s operating agreement on how ownership shall change hands. If there is no provision, and the business is sold or ownership is transferred, the LLC may be required by the state to dissolve. Compare that to a corporation, which simply involves selling and buying of shares to transfer ownership. If you plan to sell your company down the line, make sure you write into your LLC’s operating agreement how that will work.
- Taxes may be higher: This depends on your overall income, but as law firms attest, self-employment taxes often are higher than being taxed as an employee of an S-class corporation.
- You MUST keep clean records: As a WebHR article warns, not fully separating business and personal finances can eliminate legal protections your personal assets have. Requirements for recordkeeping, though not as strenuous as with corporations, are also more cumbersome than with sole proprietorships or partnerships.
Should You Choose an LLC?
Deciding whether or not to register an LLC depends on your business, overall risk of liability, and personal preferences. Some lawyers even recommend every freelancer or solo entrepreneur have an LLC, simply to protect your personal assets.
Hello Bonsai, an invoice management solutions company, offers good advice for determining whether to start an LLC. You should start an LLC if:
- You make over $100,000 per year. Once you reach a certain income level, having some legal protections is advised, as the likelihood of litigation and invoice disputes becomes higher.
- You live in a state where creating an LLC doesn’t cost much. For instance, starting an LLC in New Mexico costs only $50 and there is no annual fee.
- You have a risk of liability. For example, if you run a tree-cutting business that has loans on equipment and the risk of property damage and worker injuries, you should have an LLC (along with proper insurance).
- You want the benefits of an LLC. From personal asset protection to flexible management structures, LLCs may make your everyday work life much easier and less stressful.
If you run a low-risk, low-profit operation, such as a graphic design service, starting an LLC may not be necessary. Still, operating as an LLC carries benefits.
How to Register Your LLC as a Freelancer, Digital Nomad or Overemployed Worker
I’ve personally registered LLCs in under 10 minutes. The process is super simple. If you have a business partner and/or need to draft an operating agreement, it may take longer, but the process is still straightforward.
Here are the steps to register your LLC as a freelancer, digital nomad or overemployed worker:
- Select your state. Note you can choose a state you don’t reside in, but you must comply with the requirements, such as maintaining a registered office and agent.
- Choose a name. The name must be unique and available. You can check your state’s Secretary of State’s website.
- Submit required documents and information to your state. You’ll register the LLC with the Secretary of State. As the US Small Business Administration details, info and documents you need to provide typically includes the business name, location, and registered agent information (can be you if you’re a state resident).
- Pay the filing fee. You’ll then be registered and your LLC will formally exist.
- Draft an operating agreement. You should outline ownership and management structure, create provisions for future sale or ownership transfer, and describe how adding and removing members will work.
- Obtain an EIN. Get an Employer Identification Number (EIN) from the IRS. You can easily apply online.
Once registered, make sure to operate properly as an LLC. This includes having a dedicated business bank account, obtaining necessary insurance, maintaining financial records, and complying with local regulations by getting necessary permits and licenses. If membership changes (or anything else such as location), you should make updates with the state as soon as possible.
Benefiting from an LLC as a Freelancer, Digital Nomad, or Overemployed Worker
Whether you’re a travel writer with a variety of clients or an overemployed worker in need of an LLC for managing side hustle income, operating as an LLC can benefit you tremendously. Remember, this guide is meant to provide you with information and direction. Before making a decision, seek professional advice from a tax accountant or lawyer, as they’ll be able to provide you with the best guidance based on your local regulations and specific circumstances.
We hope this guide has provided you with all you need to know about LLCs. If you have any questions or tips, join us on Facebook and start the conversation.
About the Author
Nick Callos has always had a passion for reading, writing, and discovering the new and unknown. Originally from Cincinnati, Ohio, Nick holds a Bachelor’s Degree in English from Boston College. He currently splits his time between his hometown, Chengdu, China, and the open road. A full-time travel writer, Nick hopes his work can inspire others to explore the world more deeply and enjoy the digital nomad lifestyle.
Featured image by Bonnie Kittle on Unsplash