Transitioning from a stable, secure full-time role to a freelance consultant is one of the boldest and rewarding moves you can make.
According to Upwork’s Freelance Forward 2020 report, 59 million Americans did some form of freelance work in 2020. In addition, 58 percent of professionals who started working from home during COVID-19 say they want to keep doing freelance work or independent contractor projects on the side.
So you’re not alone!
However, before you embark on this journey, there are some important questions to ask to increase your odds of success.
One of such questions is what business structure (if any) should you adopt for your freelance consultancy?
While there are at least four different types of business structures including C-Corp, LLC, Sole proprietorship, S Corp (more of a tax structure than business), in this post, we will focus on the most appropriate business structure for a freelancer, that is, an LLC.
LLC stands for limited liability company. LLC is the best business structure for a one-person freelance business for a number of reasons we will expand on later in this article.
Is LLC appropriate for every freelancer?
The answer to this question depends on whether you want to freelance long-term and build a proper business off of it, or you’re only doing a few simple projects and don’t think you would earn enough money from freelancing.
If you plan to consult over a number of projects and a longer period of time, then it’s a great idea to look into forming an LLC.
There are five advantages you get when you set up an LLC for your freelance consultancy.
1. Professionalism: You look more professional and official to prospects and clients. Whether you’re signing a contract using your business’s name or presenting a business card that has your LLC’s name on it, an LLC gives you instant credibility and makes you look serious and professional to potential and existing clients.
2. Business Bank Account: An LLC lets you get an employee identification number; a tax ID. This tax ID makes it possible to open a bank account for your business. With a bank account, you can separate your business from your personal identity and also build business credit under the LLC’s name.
With these business bank accounts, you can keep track of your business income and keep accurate records of your earnings. In addition, you can also pay for any business expenses with a business credit card which can help you save money on work equipment, subscription services, and other office purchases, etc.
3. Build Up Business Credit: An LLC can also help you build up your business credit by working your way up to a business credit line or SME loan.
4. Tax Benefits: Another big advantage to incorporating is that it can help you save money by claiming all the tax deductions you qualify for under the law. This is possible because you now have a dedicated bank account for your business which makes it easier to report your business income. You can also choose the tax structure that’s most beneficial to your freelance business with an LLC.
5. Protection From Possible Liabilities: Having an LLC protects you from possible liabilities because it lets you enter into contracts under your company name. This can protect your personal assets in cases of lawsuits.
Having an LLC isn’t all a bed of roses as there are a few downsides too.
For one, there is often an added layer of tax which, if not done properly, may cause problems. To prevent this from happening, we advise you to get expert advice from a tax consultant to help you navigate the additional twists and turns.
An LLC could also make raising capital from outside investors more difficult. Investors tend to favor C-Corporations because they can offer stocks that do not require the holder to pay taxes until the asset is sold.
The good news though is that you can always change to a C-corporation down the road if you need to raise significant outside capital.
What do you need to set up your LLC?
Setting up an LLC is pretty straightforward with the right help or guidance.
The following are what you need to have in place before you can set up an LLC.
An available business name: choose a name for your LLC and run an availability search on the website of the secretary of state to determine if it is available.
Business purpose: the specific professional services you will engage in.
Primary business address: the physical location that serves as the base of your business operations.
Ownership: if applicable, you will need to list the members of your company with full contact information and what share of the business each member owns.
Management: Will your LLC be managed by its members or by designated managers?
Registered agent: lastly, you need to appoint a registered agent who is available during regular business hours to accept official documents on your behalf in the state your LLC is formed.
What are the most frequent mistakes consultants make when setting up an LLC and how can you avoid them?
While setting up an LLC isn’t particularly difficult, it is best left for the experts who have several years of experience doing it.
Below are a few of the most common mistakes freelancers make when forming an LLC:
1. Choosing to create an LLC if you intend to raise capital from investors
If you plan on raising capital from outside investors, then you should form a corporation and not an LLC.
2. Going for a name that isn’t available
As stated earlier, before choosing a business name, do some research to be sure the name is available and also obeys the various business name rules put in place by the state where you wish to incorporate.
3. Not having business governance documents in place
While going into business with people you know and trust like your family and friends isn’t necessarily a bad decision, it is important you have in place documents that spell out clear rules and roles for the business especially when a disagreement or an unpleasant situation arises.
4. Going it your way instead of seeking expert advice
Freelancers are DIY people, hence there is that temptation to want to get things done yourself. Here is our advice: don’t do it. Setting up an LLC along with the various tax, accounting, and legal requirements need a set of trained eyes.
After I set up my LLC, what's next?
After forming an LLC, there are a few important steps to complete to become fully ready.
1. Get an Employer Identification Number: the EIN is your tax ID provided by the IRS: You can apply for an EIN for free online at the IRS website or use a paid service that is often more convenient.
2. Open a business bank account for your LLC
3. Apply for a business credit card to make your purchases
4. Register your business with your state and obtain a seller’s permit (if applicable)
5. Obtain a local business license from your city or county depending on the type of business you’re in and where you’re located.
6. Open a Merchant Account such as PayPal or Stripe if you plan to accept and process credit card payments
7. Get legal, tax, and accounting advice from experts
8. Make a plan to keep your LLC compliant. You can sign up for a service that will automatically send you alerts ahead of key state and federal filing deadlines.
All this costly, time-consuming work can take several weeks and you still may not get it right.
The good news is you don’t have to go it alone.
Firstbase.io To The Rescue
Firstbase.io can incorporate your LLC and launch your business in 48 hours from the comfort of your couch.
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Firstbase.io has helped over 10,000 entrepreneurs incorporate and launch their businesses in the U.S.
Founders who incorporate their businesses through Firstbase also access over $40,000 in perks and get introduced to tex, legal, and accounting experts to make the entire process even more seamless.
If you do not live in the U.S or are not a citizen, then you need not worry either as Firstbase.io has partnered with Mercury to help you set up a bank account for your business without stepping foot on U.S soil.