Should I Have an LLC as a Freelancer?

Deciding to formalize a freelance business by creating a Limited Liability Company (LLC) is a major step. This structure offers a middle ground between a sole proprietorship and a corporation, but whether its benefits justify the costs depends on your individual circumstances. The primary advantage is personal asset protection, which must be weighed against new financial and administrative duties.

Understanding Personal Liability Protection

Most freelancers start as sole proprietors, a structure where there is no legal distinction between the business and its owner. If the business incurs debt or faces a lawsuit, the freelancer’s personal assets, like their home and savings, are at risk. This unlimited personal liability is a primary reason freelancers consider a more formal business structure.

A Limited Liability Company (LLC) changes this by creating a separate legal entity. This separation establishes a liability shield, the main advantage of an LLC. If an LLC is sued or incurs debt it cannot pay, the legal action is against the company, and only the LLC’s assets are at risk.

This protection is relevant for freelancers whose work carries inherent risks. For example, a freelance graphic designer could be sued for copyright infringement, or a consultant could face legal action if their advice leads to financial losses for a client. In these scenarios, an LLC ensures the lawsuit targets the business entity, limiting liability to the assets owned by the LLC and shielding the freelancer’s personal wealth.

This liability shield has limitations. The protection does not apply if a freelancer personally guarantees a business loan or engages in personal wrongdoing like fraud. Courts can also “pierce the corporate veil” and hold an owner personally liable if the LLC is not maintained as a separate entity, such as by mixing personal and business funds.

Tax and Financial Considerations

For federal tax purposes, a single-member LLC is a “disregarded entity,” meaning the IRS does not see it as separate from its owner for income tax. The freelancer reports all business income and expenses on Schedule C of their personal Form 1040 tax return. This process is identical to how a sole proprietor files taxes.

The net profit from Schedule C is subject to both income tax and self-employment taxes, which cover Social Security and Medicare. The self-employment tax is calculated on 92.35% of the business’s net profit. The 15.3% rate consists of 12.4% for Social Security, which applies up to an annual earnings limit of $176,100 in 2025, and 2.9% for Medicare, which applies to all net earnings. An extra 0.9% Medicare tax may apply if your income exceeds certain thresholds.

An LLC has the option to be taxed as an S Corporation by filing Form 2553 with the IRS. This is a tax classification, not a change to the business’s legal structure. This election changes how the owner’s compensation is treated and can lead to savings on self-employment taxes.

When an LLC is taxed as an S Corp, the owner must pay themselves a “reasonable salary” for their work, which is subject to FICA taxes. Any remaining profits can then be taken as distributions, which are not subject to FICA taxes. This separation of income into salary and distributions can reduce the overall self-employment tax burden for freelancers with high profits.

To maintain the LLC’s tax status and liability protection, you must keep business and personal finances separate. This requires opening a dedicated business bank account and using it for all business-related income and expenses. Clean financial records are a requirement for preserving the legal integrity of the LLC.

Associated Costs and Administrative Duties

Operating an LLC involves ongoing costs. The first is the one-time state filing fee for the Articles of Organization, which can range from under $100 to several hundred dollars depending on the state.

Most states also require LLCs to file an annual or biennial report to update the state with current information. The fee for this filing ranges from about $15 to $300. Some states also impose a franchise tax, which is a fee for doing business that can be a flat rate or based on revenue.

Another potential recurring cost is for a registered agent service. While a freelancer can serve as their own registered agent, this requires their address to be public. Many freelancers hire a commercial service for privacy and convenience, which costs between $100 and $300 per year.

Maintaining an LLC also requires administrative effort. Filing the annual report on time is a mandatory compliance task, and failure to do so can result in late fees or dissolution of the LLC. While not always required, keeping minutes of formal meetings helps reinforce the separateness of the business, which is important for liability protection.

Information and Decisions for LLC Formation

Before filing, you must choose a unique name for the business. The name must comply with state rules, which require an identifier like “LLC” or “L.L.C.” You must conduct a name search on the state’s business filing agency website to ensure the name is available.

Next, the freelancer must designate a registered agent. The registered agent is the official point of contact for receiving legal documents and state mail. This agent must have a physical street address in the state of formation and be available during standard business hours. While you can act as your own agent, using a professional service protects your privacy, as the agent’s address is part of the public record.

The primary document for forming an LLC is the Articles of Organization, also known as a Certificate of Formation. This form is available on the website of the state’s Secretary of State or equivalent agency. The information required includes the LLC’s name, principal business address, the registered agent’s name and address, and the names of the organizers or members.

Some states may also ask for the business’s purpose, which can be stated broadly as “to engage in any lawful activity” for flexibility. The form will also require the signature of an authorized person, known as the organizer. Completing this form accurately establishes the legal existence of the LLC.

The LLC Formation and Post-Formation Process

Once the Articles of Organization are completed, they must be submitted to the appropriate state agency, usually the Secretary of State. Most states offer online filing, which is the fastest method and requires paying the state filing fee. After the state approves the documents, the LLC is officially formed.

Next, obtain an Employer Identification Number (EIN) from the IRS. An EIN is a federal tax ID for the business, and applying for one is free on the IRS website using Form SS-4. Even for a single-member LLC with no employees, an EIN is required to open a business bank account and helps establish the LLC as a separate entity.

With the approved formation documents and EIN, you must open a dedicated business bank account. This step is necessary for maintaining the liability shield, as it prevents the commingling of personal and business funds. All business income should be deposited into this account, and all business expenses paid from it.

Finally, it is advisable to draft an operating agreement, which is an internal document that outlines the governance and operational rules of the LLC. For a single-member LLC, it formalizes business procedures and reinforces its separate status, which can be valuable in a legal dispute. The operating agreement can also specify what happens to the business upon the owner’s death or disability. This document does not need to be filed with the state but should be kept with the LLC’s records.