On the journey of quitting a 9-to-5 to start a business, I'm sure that many have underestimated all of the details one must be aware of in order for the ship to run smoothly—how to get the word out to possible clients, the best way to invoice so you can automatically keep track of your income...the checklist can be endless.
In the Core77 discussion boards, an aspiring freelancer in 2009 asked an age-old question that still has freelancers scratching their head: is setting up an LLC for your individual business a good idea or unnecessary? manty1311 asks,
"I am a recent graduate, I've been doing freelance work for about a year now and I haven't set up anything legally as a business, although I did pay taxes on my income last year. Can anyone tell me what is the best way to go about this or if it's even necessary? I've contacted local small business administrations and they haven't really helped me on how this works for the design field.
We may not be lawyers or accountants here at Core77, but we can give you a simple 411 as to the benefits and costs of an LLC and how best to investigate what's best for your own personal situation (we welcome any thoughts from tax or law savvy readers!)
The Basics: Sole Proprietorship vs. LLC
Many freelancers will begin their self-employment journey as a sole proprietorship—the long and short of this means, you are personally tied to your own business and are entitled to all of the company's profits. Your freelance profits are reported within your personal tax return. This is the easiest way to deal with your small business and its corresponding taxes: simply register your name under a DBA and any other local business licenses and you're ready to go. On the same token, if your business goes under, you will personally be responsible, i.e. your assets both professional and personal will be at stake.
An LLC, or a limited liability corporation, offers a few different advantages:
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An LLC helps you protect your personal assets from creditors if you go bankrupt—in a sole proprietorship, you and your business are seen as the same entity. This being the case, any business failures can affect your personal and professional finances. With an LLC, your business is a separate legal entity, meaning you are most likely not liable for any debts brought upon by your business. The only risk you pose in an LLC structure is losing your personal financial investments, but your own personal assets won't be up for grabs by creditors. This freedom might also allow you to make riskier, and perhaps ultimately more profitable decisions.
LLCs allow for multiple owners and members- which means this business structure is best suited for companies involving partnerships or several founders or startups projected to phase into S-corps in the future (although there are a few benefits to forming a single member LLC).
Tax options are flexible- one nice detail about an LLC when it comes to tax time is you still have the option of being taxed as either a sole proprietorship, partnership, or corporation.
An LLC can be sold and live on past you- unlike sole proprietorships, which tie your business to your own name, an LLC is separate and therefore much easier to pass along to other parties if need be.
Money- On average, setting up an LLC will cost you about $1,000 (but this is a price well worth paying if your business is at risk of acquiring debt that you would be responsible for as a sole proprietor)
It's much easier to upgrade from a sole proprietorship to an LLC or S-Corp as opposed to the other way around- it's important to do your homework about the difference between these business structures, otherwise you could find yourself in a situation that's hard to get out of if it isn't a good fit. Simply put: if you're starting a very small business with limited financial risk involved, it's certainly best to start off as a sole proprietorship.
Pay structure is more complicated- owners of an LLC cannot draw money from their own business as freely as a sole proprietor would; they must either pay themselves a salary or record payments as "owner's withdrawals". This isn't necessarily a deal-breaker, but it does make paying yourself a bit more involved.
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(Ultimately, we understand this is a highly complicated topic, so before making a final decision it's important to talk to a capable legal or financial advisor—but the more you know, the better questions you'll have for these trusted individuals.)
We want to hear from you who have wavered with this decision and your thoughts on the matter—what business structure is better for different designers? What did you choose for your business and why? Tell us in the comment feed below or on the original discussion board post!