Freelancers: What You Should Consider Before You Set Up An LLC

girl walking with her bike
Contributor Jamie Cattanach walks with her bike in St. Petersburg, Fla. Sharon Steinmann / The Penny Hoarder

The transition from working a “normal” job to becoming a full-time freelancer is always full of surprises. One of them? Hiring professional tax-time help.

Which is how I found myself across the table from a local CPA, hesitantly showing her my color-coded income spreadsheets. Honestly, I couldn’t believe I was in an accountant’s office in the first place – talk about adulting. And now, she was suggesting another mysterious challenge: moving my fledgling freelance business to the LLC level.

Calculated risks had always proven to help my business in the past, and this one was sanctioned by someone who knew a whole lot more than I did. So I followed the precedent I’d set in all other aspects of my freelance career: I dove in head first and figured it out as I went along.

Should You Take Your Freelance Business to the LLC Level?

What’s the benefit of upgrading your freelance business to an LLC in the first place?

For one thing, it protects your personal assets in the event you run into any legal trouble. That’s why it’s called a “limited liability company;” you’re only liable for the assets you’ve put specifically toward the business.

Especially as a freelance writer, that can be an important consideration. I’m meticulous about fact-checking my work, but I liked the security of knowing I’d be able to distance myself (and my belongings) in case I were ever, for example, charged with libel.

There are lots of other benefits to incorporating, too, some of which we’ve covered here before — as well as how to get going.

But the main reason I took the dive was purely monetary. By moving to an LLC and taking the S-corporation option, I’d avoid paying self-employment tax on a significant portion of my income.

Instead, I’d hire myself through the business as an employee and pay regular income taxes. (Yes, this is perfectly legal and fairly common, often referred to as a “pass-through” taxation structure – and yes, it means I got to file a W-2 as both hiree and employer, which was pretty weird.)

All told, I’m glad I made the decision. Not only is it helping me save money, but it also – arbitrarily, I admit – makes me feel like a more legitimate entrepreneur.

But there are a few things I wish I’d known before I’d started filling out the paperwork.

Red tape is a real thing – and it is, in fact, pretty annoying.

The magical line of demarcation between freelancer and business owner is formed by a pile of paperwork – and I’m not talking about filing the business name. That’s the fun part.

Once I’d secured the LLC itself, I still had to get legitimate with the city.

To make myself legitimate, I’d need to obtain a business license; to obtain a business license, I’d need to visit zoning; to appease zoning, I’d need to assert that my workspace (i.e. home office) was appropriate and that my business wouldn’t be disruptive to my neighbors. And to do all of this I’d need to take myself, in person, to the courthouse.

It wasn’t that big of a deal, and most of it was only a one-time hassle. But anyone who’s ever waited through an interminable DMV line knows that government offices can be … frustrating.

What I thought would be a straightforward afternoon trip ended up with me ping-ponging between a variety of different buildings to hit all the requisite departments, each of whom wanted at least a little bit of my money. (They were all deductible expenses, but still.)

And in fact, I got off pretty easy; it could have been a lot hairier if I’d lived in the historical downtown part of my city, which requires a second, more stringent license – or if my business model necessitated in-person client meetings, which may have caused my residentially zoned home office space to be denied.

Your experience with this part of the process will vary depending on your specific business type and location, but just be prepared to spend an annoying amount of time and money to get a little piece of paper that says your work is legal – even if it’s the exact same work you’ve already been doing for a while.

It makes the money tree more complicated.

Part of the point of going LLC is separating your assets, but doing so can complicate your personal finances. In order to get the tax benefits of the S-corporation selection, I have to put all my earnings into a business account, from which I pay myself payroll – which, by the way, costs money to process. That is, I have to pay to get paid.

It also means I’m back to waiting for a paycheck, which I thought I’d left behind with my office days. And since freelance income is notoriously fickle and payroll is timely, there have been some instances where I’ve had to transfer money from my personal savings into my business account to make it work. (On the plus side, it is a nice change to know exactly how much money I’ll have my hands on, and when, throughout the month.)

In short, the LLC structure can definitely save you money … but it might limit or complicate your access to it in the short term. These days, my finances feel a bit more like a set of Russian nesting dolls than a simple flow chart.

Timing is everything.

My accountant had first suggested making the LLC move back in the summer of 2017, when I’d only been freelancing for a few months. I didn’t feel ready to add another set of obstacles to my business, so I put it on my 2018 to-do list.

Of course, once the new year rolled around, other goals had my attention. I didn’t end up incorporating officially until Jan. 23 … which means I still had to pay regular estimated quarterly taxes, including self-employment tax, on three weeks’ worth of income this year.

Furthermore, the business licenses in my county run Sept. 30 – Oct. 1, and although it was pretty darn cheap in my case – less than $30 – it’s not prorated. So I won’t get a full year of licensing for what I paid. Moral of the story: Things would have been a little smoother if I’d done a bit more planning.

Is an LLC Right for Your Business?

Despite the minor headaches outlined above, I’m glad I took my accountant’s advice – and not just because it feels super snazzy and official when I put business expenses on my company credit card. (It is true I expense things more often now, though that’s in part because I’m doing more expense-able things like going to conferences; I was too busy flailing to do so during year one.)

Even with the additional expense of payroll and the minor gaffs I made with timing, the math plays out. My various business taxes and the income taxes on my wages add up to a total about 10% smaller than what I’d been paying as an individual.

In the end, whether moving to an LLC or taking the S-selection works for your business depends on personal circumstances, and should probably be a decision you make with the help of a qualified accountant.

But no matter what you decide, one thing’s for sure: It feels pretty awesome to have – that is, be – the kind of boss who lets you work from home in your pajamas.

Jamie Cattanach (@jamiecattanach) is a writer based in St. Augustine, Florida. She’s written for Yahoo, SELF, The Establishment, Ms. Magazine, Roads & Kingdoms and other outlets.