How to Set up an LLC as a Freelancer

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So, you’ve a newly minted Freelancer (or maybe you’ve been doing this awhile), and you keep hearing you should set up an LLC. It is one of the most common pieces of advice freelancers and small businesses get. If you are confused, don’t worry, you are not alone. We’ll break it down for you. 

The process itself is relatively easy but it is important for you to understand what this means as there are legal and financial implications (yeah, like taxes). It’s also more than simply filling in a form and paying a fee. Most states have annual or bi-annual requirements (meaning you need to refile to keep current and pay recurring fees). If you don’t, the benefits of doing so could be rendered useless. 

Don’t worry, it’s not as scary as it may sound. We’ll take a look at what an LLC is, why it can be a good idea as a Freelancer business, and how to set one up.

What’s an LLC?

Most of us understand the concepts behind a corporation, a partnership and a sole proprietor (most likely how you are operating today by default), but an LLC is a little less clear. “LLC” is short for “limited liability company,” and is formed at the state level, under the governing laws of the state.

A limited liability company (LLC) combines elements of a partnership, sole proprietorship, and a corporation to ensure that the owners of the company are not personally liable for their company’s debts or liabilities. When you form an LLC, you are no longer considered an “owner” of the business but a “member.” Don’t worry, it’s really just a legal distinction, albeit an important one, as you are still in charge. And don’t worry about being the “only member”; it only takes one member to form an LLC.

So Why form an LLC?

We’ve already discussed how the members (or member, we got you Freelancers) are not held personally liable for any debts or legal liabilities incurred by the business. The legal protections alone  probably make it worth it, as without these protections, you could be risking personal assets in a bankruptcy, and if you find yourself facing a lawsuit, you could be held personally liable for any legal claims.

While limiting your personal liability is certainly a major perk, it is not the only reason to consider an LLC. By forming an LLC, you create a sense of credibility and being established. Some larger clients simply won’t work with businesses if they aren’t incorporated. Especially if you are just getting started, this could give you that extra sense of professionalism.

What about taxes? While LLCs don’t have their own federal tax classification, LLCs can bring tax advantages. Freelancers are able to take advantage of “pass-through” taxation, which basically means that rather than paying corporate taxes, any income generated by the LLC passes through to the member(s) personal tax returns, who then must report all profits (or losses) of the LLC on Schedule C and submit it with their 1040 personal tax return. While LLCs do not pay any federal income taxes, some states levy an annual tax on LLCs.

As always, we recommend you consult with a CPA and/ or business attorney before incorporating as an LLC to discuss your specific situation. They can also help you maximize deductions as well as explain how to navigate your Quarterly Taxes. Yep, that’s a thing.

Now, let’s look at how to set up an LLC.

How to Set up an LLC

So you’ve consulted with the experts and decided an LLC is right for you. Here’s what you’ll need to get started to ensure both proper formation and ongoing maintenance.

1. First, you need to fill out a form with basic information about you and your business that will be sent to the secretary of state in the state in which you plan to incorporate and pay a fee. This registers your LLC but is not all you need.

2. Second, you must also file a document called “Articles of Organization.” Don’t think that this is optional as it is actually a critical management document. Failure to do so may result in the member(s) of the LLC not being fully protected financially and legally (kind of the main reason you are doing this).

3. Third, get an EIN (Employer Identification Number).

Even freelancers with no intention of hiring employees should apply for an EIN. Why? You can use your EIN on W9s and other required forms, protecting your Social Security number from clients and vendors.

Note: Some states also have some quirky requirements in place for LLC formation like mandating you publish notices in local newspapers; some states separately require special business licenses and sales permits. For these reasons and to ensure you have everything buttoned up, it’s probably not a bad idea to seek legal guidance. 

That’s it, at least for your initial filing. The best part is Oxygen can help you do all of this and submit your LLC application via our partner CorpNet right in our app!

So that’s it?

For initial filing yes, that’s pretty much it. While it is true that once you are set up your LLC exists forever, there is some minor work to help you manage it and keep it current, most importantly, filing an annual or bi-annual report (depending on the state) and paying a fee, making it important to keep up with the filing dates and fees for your state. 

What happens if you don’t do this? Well, you may render your LLC inactive, which defeats the whole purpose.

Separate Business & Personal Bank Accounts

Finally, you must treat your LLC as a separate entity. One of the easiest ways to do this is to keep your business and personal finances completely separate. It’s really important for your accountant to do your taxes correctly, and using one account for both, you risk commingling funds, not accurately tracking deductible expenses, and potentially putting you afoul of the IRS. For this reason, we recommend looking at a business bank account to ensure you are best positioned to file your business taxes and staying on good footing with the IRS. It can also be a huge deal to be able to qualify for any type of small business financing down the road. The good news is with Oxygen, you can apply for both and easily navigate between your personal and business accounts right in the app!

If you would like to find out more about Oxygen’s Personal and/ or Business accounts and LLC formation, click here.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank (“Bank”).  Bank is not responsible for the accuracy of any content provided by the author(s) or contributor(s).

Banking Services provided by The Bancorp Bank, Member FDIC. The Oxygen Visa® Debit Card and the Oxygen Business Visa® Debit Card is issued by The Bancorp Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted.

LLC formation is powered by CorpNet, Inc. Fees for LLC creation differ by state and services selected.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank (“Bank”).  Bank is not responsible for the accuracy of any content provided by the author(s) or contributor(s).

Banking Services provided by The Bancorp Bank, Member FDIC. The Oxygen Visa® Debit Card and the Oxygen Business Visa® Debit Card is issued by The Bancorp Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted.

LLC formation is powered by CorpNet, Inc. Fees for LLC creation differ by state and services selected.

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