Whether your freelance is a “side hustle” to bring in a little extra cash or a full-time career, you’re not alone in your desire to work on your terms. More than a quarter of all Americans engage in some form of freelance work, according to the Pew Research Center.
When setting up a freelance business, you need to make some important decisions. One of your most important choices will be whether to set up your business as a sole proprietorship or as a limited liability company. There are pros and cons to both.
Sole Proprietorships vs. LLCs
Most freelance businesses begin as a sole proprietorship since it requires no paperwork. If you’ve been doing business as a freelancer and have never filed to create an LLC or another type of corporation, then you already have a sole proprietorship. You still need to file a “doing business as” certificate with your county clerk if you use a business name that’s not your legal name, and you must obtain any necessary permits or licenses, but that’s the extent of the red tape for a sole proprietorship.
But even though the simplicity of a sole proprietorship is attractive, registering your freelance business as an LLC may be a better option. An LLC offers more flexibility for growth, and it also protects your personal assets in case your business gets sued or encounters financial trouble. And you don’t need to be a career freelancer to register as an LLC; you can register even if you work full time for another company.
What Is an LLC?
LLC stands for “limited liability corporation,” which sounds very formal and official. You probably never thought of yourself as a corporation before! But don’t let that term fool you — you don’t need to have employees or a complicated corporate structure to create an LLC. In fact, after you create an LLC, you can keep doing business the exact same way as before — for the most part.
But in the eyes of the law and the State of Michigan, something important happens when you file an LLC: your business becomes a separate legal entity from you as a person. Once that happens, you receive some very important benefits and protections, which we’ll talk about next.
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The Power of an LLC
The thought of adding “LLC” to your business name may sound like a big deal. And it is, in some ways. Even though LLCs are easy to set up, they provide some powerful advantages:
- Asset protection: If your business is registered as a sole proprietorship, your personal assets and your business’ assets are one and the same. If someone sues your sole proprietorship, they can come after your personal property — your house, your car, and anything else you own. The same is true if your sole proprietorship gets into financial trouble: debt collectors can come after your personal property. When you have an LLC, your personal property stays separate from the business, so no one can come after your home or your vehicle to satisfy a business debt (usually; keep reading to learn about exceptions).
- Tax benefits: Once you have an LLC, you can write off many business expenses. You can deduct from your taxes for costs like equipment and tools, travel costs, internet service, and even utilities. However, keep in mind that if you want to start writing off business expenses, you’ll need to start tracking them carefully if you haven’t already been doing so.
- Simplified growth: If you decide you want to scale up your freelance operations into a small business and hire an employee or two, then you can’t operate as a sole proprietorship anymore. However, if you have an LLC, you’ll already be ahead of the game, and you can start issuing paychecks, withholding taxes, and performing other employer functions without having to change your business structure.
- Appearance: Never underestimate the power of perception. Potential clients or customers may take your business a little more seriously once you add those three little letters to the name. Creating an LLC signals that you’re serious about your business and plan to stay around for the long haul.
LLCs Have Limits
LLCs have the word “limited” in their name for a reason: the protections you get by forming an LLC aren’t absolute. You can still be held personally liable for debts in certain situations. For example, if you cosign your own name on a business loan for your LLC, or if you put up your personal property as collateral for a business loan, then your personal assets could still be on the line if someone comes to collect.
And, hopefully this goes without saying, but you can’t create an LLC so you can purposefully run up huge debts, commit fraud, or take huge risks with your savings. If a judge finds that you engaged in fraud or failed to keep your personal assets separate from those of the business, then they can tear down your LLC protections and expose you to personal liability again.
How Do I Form an LLC?
To register as an LLC, you need to file a short form called an “articles of organization” with the State of Michigan, and you’ll also need to pay a fee of $50. You can even register your Michigan LLC online if you prefer.
As soon as you’ve created your LLC, you’ll need to open a separate bank account for your business. If you frequently use a credit card to pay for business expenses, then your business will need a separate credit card as well. You’ll also need to start keeping track of expenses, which includes saving and organizing receipts, bills, and any other relevant records.
When tax time comes, you can report your business income, losses, and write-offs. If you’ve never prepared taxes for an LLC before, then you may want to consult a tax professional before you prepare and file.
Law Offices of Kari Santana: Trusted Advocates for West Michigan Business Owners
The team at the Law Offices of Kari Santana assists West Michigan business owners at every stage of business development. Whether you’re negotiating your first contract or you’re looking to build a business succession plan, we’re here to help. To schedule your free initial consultation, fill out our online contact form or call us at 616-717-5759.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.