Freelancing has become one of the most popular ways to make a living in your own time, according to your own rules. But with the rising costs of living in the US, it’s becoming harder for freelancers to offset their expenses. Marketplace highlights that consumer prices jumped 9.1% in 2021, the highest it ever has in 40 years. Of course, saving up has become much more difficult as well. Fortunately, forming an LLC might just be the answer to this dilemma.
Financial Risks of Freelancing
As we highlight in our article ‘Is Saving 50 Percent of Your Income Good?’, Americans save only 5% of their income. This statistic also doesn’t mesh well with the sporadic nature of freelancing, which is another big career and financial challenge one has to face. Projects can get shelved, clients may choose to end a contract early. You may even struggle to find work for long periods, which means you may have to dip into your savings to get by.
Even worse, disgruntled clients can ruin you financially. Freelancers can get sued by clients for an array of reasons such as missed deadlines, malfunctions, errors, or security flaws that surface. You can also get in trouble for something as simple as copyright infringement. That said, the first step to protecting yourself as a freelancer is to form a legal entity in the form of an LLC, which opens the door to more insurance policies and stronger contracts.
Starting an LLC as a Freelancer
Starting a Limited Liability Corporation or an LLC is much simpler than you think, and How to Start an LLC outlines the eight essential steps. Firstly, decide on a company name and make sure it’s available. Next, file your LLC registration papers and select a registered agent. You then create your new LLC’s operating agreement, retrieve your Employee Identification Number (EIN), and open a bank account.
How It Can Save You Money
One of the most important aspects of an LLC is its tax regulations. Although the IRS or the Internal Revenue Service explains that these differ from state to state, most provide the same advantages. LLCs, whether single-member or multi-member, aren’t subject to double taxation. This refers to when a company’s profits are taxed once during the filing of business taxes, and again as the owners file their income taxes with the IRS.
Furthermore, an LLC grants you personal liability protection. By separating your personal assets from your business assets, you can keep them safe in the event that you’re sued by a client. Compared to forming corporations, starting an LLC is also the most cost-effective, and will usually cost around $1,000. That said, an LLC allows you to allocate more of your earnings to savings, while also keeping your assets safe.
Additional Benefits of an LLC
This CNBC feature highlights that freelancers and small business owners make the leap because they value flexibility and having complete control over their professional endeavors. That said, an LLC allows members to determine how profits are shared, which can be outlined in the required operating agreement. It also gives you full reign on the administrative side, which can also aid you with maximizing profits and allocating them to savings or the expansion of your freelance gig.
Although freelancing comes with many benefits, becoming a financially savvy freelancer can take quite a bit of work. But learning about different kinds of business schemes and their advantages will allow you to have greater power over your finances, so it’s worth doing your research.