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Thinking about becoming an LLC

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Community Manager
Lena E Community Manager Member Since: Apr 7, 2015
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Congratulations – you took a huge step by deciding to work as a freelancer. The thing is, now you’re not just a freelancer…

You’re also a business owner.

This not only creates a number of opportunities for you, but it also exposes you to certain risks. So you need to protect your business, and yourself personally. Below are some suggestions to help grow your business and protect yourself.

You can begin by choosing a legal entity like an LLC or corporation. If you’re thinking, “I’m not big enough for that yet” consider this: If you’re taking payment for any work done, you’re big enough to think about it now.

Why?

Three reasons. One: You’ll appear more credible and reliable. This can make you more attractive to larger companies who have higher value projects. Two: If someone sues you, it can help protect your personal assets. Three: Setting up a legal entity can save you money on taxes, depending on how you set it up.


Types of LLCs

If you’re considering a Limited Liability Corporation (LLC), keep in mind there are several options. Each has its advantages and disadvantages, so be sure to consult a professional when deciding which is best for you. The three most common are:

  • Single member LLC – A solopreneur can receive the benefits of limited liability protection, and choose to be taxed as a corporation or as a sole proprietor.

  • Multiple member LLC – Traditional LLC with multiple members. This provides members the option of being taxed as a corporation or a partnership.

  • Series LLC – This is a newer option in which a company creates a master LLC and then issues “series LLCs” under that umbrella. It can be ideal for companies that have different assets, members, or purposes. Some services provide inexpensive solutions that enable you to create a series LLC under their master LLC. In this arrangement, the service handles the filing requirements.

If you’re considering a series LLC entity, Pro-Tier can set one up for you quickly and for less than...

 

Pros and Cons of a Limited Liability Corporation (LLC)

Pros Cons
  • Less hassle. Starting and maintaining an LLC requires less paperwork than other corporate entities.
  • Live outside the U.S. Members don’t have to be U.S. citizens or permanent residents.
  • Protect personal assets. Members can be shielded from personal liability for a company’s debts.
  • Greater credibility. Banks, vendors, and prospective clients may look more favorably on an LLC than an individual.
  • Profit sharing flexibility. Members can share profits any way they desire, instead of being limited to a percent of ownership.
  • Costs. Creating a legal entity costs money up front and each year to maintain.
  • Limited investment options. You can’t issue shares of stock to attract investors.
  • Differing rules. LLCs can be treated differently in certain states.

 

 

 

 

5 WAYS TO MAXIMIZE YOUR LL PROTECTION

We’re often told that if we’re ever sued, the LLC ensures only the company—not you personally—is liable. Because your LLC creates what’s often called a “corporate veil.” But what many business owners don’t realize is it’s still possible to pierce that veil.

 

When the veil is pierced, a business creditor can collect corporate debt by suing you and other individual members. Yes, this means they can ignore your LLC and go after personal assets like your savings, your car, and your home. But there are ways to protect yourself and reduce business risk. You start by reinforcing the corporate veil. This requires making a clear separation between you personally, and your company.

 

The five tips below can help you make the separation very clear. They’re so easy, you may already be doing some of them now. Read on to make sure you don’t miss anything.

 

Online services like Incorporate.com can help you choose the ideal corporate type and provide additi...

 

1. Set up a business bank account
When you have a separate personal bank account from your business, it helps show your business is legitimate and distinct from your personal finances. Keeping separate accounts also provides other benefits:

 

  • Qualify for deductions. Keeping separate accounts reduces risk of the Internal Revenue Service (IRS) classifying your company as a hobby business, instead of a valid business. When the IRS sees you as a credible business, you may qualify for more tax deductions. In the event of an audit, you may be able to keep those deductions too.
  • Track business health. Separate accounts make it easier to track monies flowing in and out, which makes it easier to track profitability and how you’re meeting growth goals. It also helps you collect information faster for tax time.

  • Bolster credibility. Appearances matter. If your checks come from your personal account, or you can’t take credit cards because you don’t qualify for a merchant account, your business may seem less legitimate. This may cause prospects and customers to question your professionalism and credibility.

2. Get an EIN
EIN stands for Employer Identification Number. It acts like a Social Security number (SSN) for your business. Having an EIN further establishes your business as separate from your personal identity, and can provide the following benefits:

  • Identity protection. Instead of using your SSN on bank, client and business documents, you’ll use the company’s EIN.

  • Worker flexibility. You need an EIN for hiring employees. You also need one to withhold taxes on income other than wages when hiring a non-resident alien.

  • Keogh plan. If you’re considering a Keogh plan as part of your retirement strategy, you need an EIN to participate. It’s required of self-employed persons and unincorporated businesses.

You can register for an EIN directly from the IRS website.

3. Get a business license
A business license or registration may be required to comply with tax and legal requirements. Whether a business needs a license usually depends on what type or size of business, and where it’s located—not whether it’s an LLC.

Local laws for business licenses vary, and states, cities and counties sometimes require separate business licenses. If you’re tempted to forego this, think twice. For instance, if you run a business without a license in Washington, you can face fines.

Business licenses are updated annually. But keep in mind, your license can change as your business changes. In some locations, your license can change when:

  • Your company begins transacting business in another city, county of state
  • Your company hires a new employee
  • Your company sells a new product or service
  • You open an additional business location
  • You close a business location

TIP: Check with local, state or regional agencies for help. Many government agencies are setting up helpful websites with information on tax and licensing requirements. For example, New York State’s business startup website shows you all your business requirements and gives you direct links to the appropriate agencies.



4. Update your operating agreement

An operating agreement is a document describing how your LLC is governed between members and how funds are contributed and distributed. To remain valid, it should be reviewed annually.

An operating agreement isn’t always required for LLCs. But even if the entire company is just you, it’s still a good idea to keep an updated operating agreement on file. For taxes and liability, an operating agreement further separates the business owner personally from the business.

What’s more, if your LLC doesn’t have one, it’s subject to the “default rules” of the state in which the LLC is organized. This lets the state tell you how to dispose of your business assets in case of a claim or your passing.

Every state has different requirements on what the operating agreement should include, so you may want to consult a professional for advice.

5. Hire a registered agent
A registered agent is your company’s point of contact with the state and other businesses. Companies that create legal entities usually provide this service for an additional fee, which saves you time spent searching for and hiring a registered agent on your own. Another option is appointing one of your company’s members as the registered agent. But consider hiring a professional registered agent if:

  • You’re incorporated in a state other than where your business is located. You are legally required to have a registered agent with a physical address in the state where your company is incorporated.

  • You’d rather not track paperwork. While you’re busy working on the business, a registered agent notifies you when corporate documents are due. This helps keep you from accidentally losing your corporate protection, incurring penalties, or late fees.

  • You work from home, are often out of the office, or work unusual business hours. The address of a company’s registered agent is a matter of public record. Using the professional registered agent’s address helps protect your privacy, and may prevent unexpected visitors at your doorstep. It can also curb the amount of junk mail you receive from marketers. Registered agents also ensure you receive important documents on time. If you’re ever served in a lawsuit, a police officer or agent hands the notice to your registered agent, who will then contact you immediately. Even if you’re not home, this ensures you answer the notice by its deadline.

  • You use a P.O. Box as your business address.The registered agent must have a physical address. If you’re using a P.O. Box as your only business address, you can’t serve as the registered agent.

 

Worth the effort

By following these five tips, it can help your business look more valid from a legal standpoint. Therefore, courts may be more willing to agree that your business is entitled to legal protection as a company.

Not only will you be better protected, but it also shows prospective clients that you’re running a legitimate business. This may help them feel more comfortable choosing you over someone else. And it can help you attract business from larger companies. The good news is, you don’t have to figure everything out on your own.

There are numerous products and services available that are designed to help freelancers maintain and build a thriving business. As an Upwork member, you may qualify for discounts to set up your business entity, determine whether you need any business licenses or registrations, and much more.

Be sure to check out your exclusive offers at Upwork’s Business Resources page today >

Disclaimer: This article doesn’t address all legal or tax issues for freelancers, and it cannot and should not be relied upon as legal or tax advice.

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