How to Start Your Freelance LLC
An LLC gives freelancers a reputation boost and liability protection. LLCs do come with startup and ongoing costs, additional rules, and slightly more accounting. Starting an LLC depends on your preference—LLCs do have some advantages, but staying as a sole proprietor is a reasonable alternative.
Limited Liability Companies (LLCs) are the fastest, easiest, and cheapest types of “separate business entities” to set up and run—this makes them ideal for freelancers. But, an LLC may also be more than you need right now. If you don’t choose to create a separate company like an LLC, then a freelancer simply defaults to being a “sole proprietor”—and that’s a perfectly fine way to run your business.
You don’t need an LLC to be a freelancer or to do freelance work, although they can provide some advantages. We’ll break down everything you need to know, so you can choose if a freelance LLC is right for you.
You’ll learn why you might create an LLC, the differences between an LLC and a sole proprietor, who can start an LLC, where to form one, types of LLCs, what you need to file, and how LLCs are treated for taxes.
Why would I choose to start an LLC for freelance work?
Here are the main advantages for creating and running a freelance LLC:
You will have liability protection which can protect your personal assets against legal action.
An LLC can provide you with a reputation boost that could help you win more freelance work.
Running a freelance LLC is simple and there’s very little administrative overhead.
An LLC will need a separate business bank account which can provide more control over your finances and accounting.
LLCs don’t have shareholders or a board, so you don’t need to issue share certificates, hold formal meetings, or record meeting minutes.
LLC owners report, file, and pay taxes in a very similar way to sole proprietors, so there are no tax advantages or disadvantages.
Let’s dig into the liability protection and reputation boost aspects a little more.
Liability protection for your freelance business
An LLC provides liability protection, which separates your freelance business assets, debts, and obligations from your personal ones. This means if someone tries to take legal action against you or sue you, they can only target what your LLC owns, like your business bank account. Your personal assets like your house, car, checking account, and savings would be protected.
Reputation boost for your freelance business
Having an LLC after your company name shows your clients that you’ve gone to the extra effort of setting up and running an LLC. This can improve your reputation and make them more confident about doing business with you. Some businesses might insist on working with a company rather than an individual.
What is a separate business entity?
A separate business entity is a type of business that you create by filing specific paperwork with your secretary of state. There are several types of entities in the US: LLCs, S corporations, C corporations, and Nonprofits.
If you don’t want to start a separate business entity—that is, you just decided to start working as a freelancer without filing any special paperwork, then you’ll be classed as a “sole proprietor.”
Why would I choose to stay as a freelance sole proprietor?
You don’t have to start an LLC to do freelance work, and you might prefer to stay as a sole proprietor:
LLCs do have initial setup costs which can be anywhere between $50 and $400, depending on your state.
Many states require an LLC to file a report every one or two years; you’ll also need to pay a fee which can be anywhere between $15 and $800.
There is a minimal administrative overhead to forming and running a freelance LLC. This mainly comes from the effort to create the LLC in the first place, and setting aside some time each year to prepare and file your annual report.
You will need a separate business bank account as a freelance LLC which can make your bookkeeping a little more complicated.
In some cases, you might need to create an “Operating Agreement” for your LLC, although there are plenty of templates you can use for this.
You will need a Registered Agent for your LLC. You can be your own registered agent, or you can pay for a registered agent service.
You will normally need to get an Employer Identification Number from the IRS and use it on your tax correspondence. EINs are free.
I did make the choice to run my freelance business through an LLC, and I formed that LLC just before I started freelancing. I’ve never used the liability protection, but I like knowing it’s there. I’m also certain that the reputation boost of being an LLC has helped me win clients, as I freelance exclusively in the “Business-to-Business” space and I think it adds a little polish. I paid just over $100 to create my LLC, and pay an ongoing fee of around $200 to file an annual report. I am my own registered agent, so I don’t pay an additional fee for that. I also take advantage of S corporation taxation to pay lower self-employment taxes.
Should I start a freelance LLC or stay as a sole proprietor?
The main reason to stay as a sole proprietor, rather than to create an LLC is to save money. You won’t have to pay to create an LLC or pay an ongoing fee to file a regular report or use a registered agent service. You won’t need a separate freelance business bank account either.
If you have enough work coming in that you can afford a few hundred dollars a year, then the liability protection and reputational boost will make an LLC an attractive choice. There’s one more reason too—eventually you could pay lower taxes if you have an LLC. Yay!
Paying less tax through being a freelance LLC taxed as an S corporation
When you start earning some good money from your freelance career, you may want to pay less self-employment tax. You can do this by having an LLC and electing to have it “taxed as an S Corporation.”
This becomes worthwhile once you start bringing in around $70,000 or more each year through freelancing. You can only choose to be taxed as an S corporation if you have an LLC, you cannot do that if you’re a sole proprietor. This is definitely something to think about for the longer term.
I started an LLC as soon as I moved to the US and began performing freelance work. I ran a similar type of business in the UK (where I moved from), and have completed all of my freelance work in the US through my LLC.
When can I start a freelance LLC?
You can start an LLC whenever you want to. You can start one as soon as you begin freelancing. Alternatively, you can easily run for a year or three as a sole proprietor and then decide to create an LLC later. Some freelancers may remain as sole proprietors for their entire careers and never create an LLC. It’s entirely up to you.
I’m a permanent resident of the US (a Green Card holder), but I’m not a citizen. I was still able to form and run an LLC here without any problems.
Who can start a freelance LLC?
You can. There are almost no restrictions on who can start an LLC.
I live and carry out freelance work in North Carolina, so I created an LLC with the NC secretary of state. Because I do all of my work in NC, I don’t need to create an LLC elsewhere.
Where can I start a freelance LLC?
LLCs are created on a state-by-state basis. You just need an LLC in the state where you live and are planning to do freelance work—even if you’re working for clients in other states or countries. This means you should form your freelance LLC in your home state by filing paperwork with your secretary of state or business formation body.
I own my LLC with my wife. This means we’re a multi-member LLC. We’ve also elected to be taxed as an S corporation. So, we’re a multi-member LLC that has made an S corporation election.
Are there different types of freelance LLCs?
There are three main types of LLCs:
Single-member LLCs: This is the type of LLC you will have if you’re a solo freelancer and are the only person who owns your LLC.
Multi-member LLCs: If you own and run your LLC with other people, for example, your spouse, then you’ll be classed as a multi-member LLC.
LLC taxed as an S corporation: Freelance LLCs can “elect” to be taxed as S corporations by filing a specific form with the IRS. This means you could pay lower self-employment taxes but does create more paperwork, overhead, and tax forms.
How do I set up an LLC as a freelancer?
Starting an LLC is actually pretty simple. You can either create a freelance LLC yourself, or form an LLC through a company formation service. A formation service will make things quicker and easier, but they will often charge a fee. That said, it’s often worth the fee as a formation service will help ensure you don’t make mistakes.
If you’re forming a freelance LLC yourself, here are the steps you’ll need to follow:
Decide on the state where you want to start an LLC. This should generally be the state where you live and provide freelance services.
Go to your state business formation agency’s website (normally your secretary of state) and choose the section to do with LLCs.
Read their instructions on starting an LLC and the forms you need. The main form will normally be called “Articles of Organization.”
Decide on a name for your LLC and make sure it’s not used by any other business entities in your state.
Download the form and gather the information you need to complete it. This will include your business name, registered office address (which can be your home), details of your registered agent (which can be you), and some other information.
Fill the form in and send it to the business formation agency, together with your LLC formation fee.
After a week or two, they will form your LLC and let you know.
That’s it!
A formation service will allow you to do all of this online, and can make the whole thing easier. Once you’ve created your LLC, there are a few more steps you’ll need to take:
It’s good practice to get a free Employer Identification Number (EIN) from the IRS, whether you have employees or not. Some banks and other organizations will ask for an EIN.
You will need a separate bank account for your LLC under your LLC’s name. Talk to the bank where you have a checking account, or look for other banks that provide business accounts.
You may want to create an Operating Agreement for your LLC. In most states, it’s not strictly necessary, but it can still be a good idea.
Remember to file an ongoing report on a regular basis if your state requires one (most do).
How do I pay myself from my freelance LLC?
Your freelance LLC will have its own bank account. This is where you’ll receive money from your invoices and pay your business expenses. When you want to pay yourself, you transfer money from your business bank account to your personal checking account. You then show these transfers in your bookkeeping software as “Owner Draws,” “Drawings,” or similar.
You will pay taxes on any profits you make in your freelance business, regardless of whether the money is in your business account or your personal account. This means your taxes won’t be affected by when, how often, or how much money you transfer between your accounts.
How are freelance LLCs treated for tax purposes?
LLCs are treated very similarly to sole proprietors when it comes to bookkeeping, accounting, filing, and paying taxes.
LLCs are treated as “disregarded entities” by the IRS. Any profits you earn in your freelance LLC pass through to your 1040 tax return and you’ll pay self-employment and federal income taxes on them there.
LLCs are also treated as “disregarded entities” by your state’s Department of Revenue. Any profits you earn in your freelance LLC pass through to your state tax return and you’ll pay state income taxes on them there.
If you’re a standard, single-member LLC, you’ll just complete your federal and state tax returns as normal.
You will need to complete additional “schedules” and attach them to your 1040 return, but this is straightforward. These are likely to be a “Schedule C” that covers your business earnings, and a “Schedule SE” for your self-employment tax.
There may also be separate schedules that you need to attach to a state tax return. These will vary by state.
If you run a multi-member LLC, you will also need to complete a Form 1065, US Return of Partnership Income.
If you’ve elected to be taxed as an S corporation, you will need to complete a Form 1120S US Income Tax Return of an S Corporation.
Depending on your state, you may also need to collect and pay sales tax on your freelance services. Rules on sales tax can be complicated, so always check with an accountant.
Does my freelance LLC need to pay estimated taxes?
Whether you’re a sole proprietor or an LLC, you will need to pay estimated taxes to the IRS four times a year. If your state charges an income tax, you will also need to make estimated tax payments to your state’s Department of Revenue.
You will pay estimated taxes on the following dates:
Estimated tax payment one is due on April 15, for freelance profits earned between January 1 and March 31 that year.
Estimated tax payment two is due on June 15, for freelance profits earned between April 1 and May 31 that year.
Estimated tax payment three is due on September 15, for freelance profits earned between June 1 and August 31 that year.
Estimated tax payment four is due on January 15, for freelance profits earned between September 1 and December 31 of the previous year.
If the estimated tax due dates fall on a weekend, the due date will be the Monday following.
The IRS will expect you to pay both self-employment and federal income taxes on your freelance profits for the relevant periods. You will report and file these amounts on a Form 1040-ES.
Your state’s Department of Revenue will expect you to pay state income taxes on your freelance profits for the relevant periods. The form used to report and file your state taxes will vary between states.
If you don’t pay enough estimated tax through the year, then you will need to make up the difference when you file your end-of-year taxes. Depending on how much the shortfall is, you may also need to pay interest on the tax you owed.
If you have overpaid your estimated taxes, you will get a refund when you file your end-of-year taxes. You can either choose to have that paid back to you, or use it towards next year’s tax bill.
How do I prepare and file my freelance LLC taxes?
Pay your estimated taxes on a regular basis, as we’ve discussed above.
Enter your freelance invoices, expenses, and other transactions into your bookkeeping app throughout the year.
At the end of the year (before the middle of April), get a “Profit and Loss (P&L)” report from your bookkeeping software.
Use the freelance revenue, expenses, and profits shown on your P&L to prepare your tax return.
If you’re a single-member LLC without any special tax elections or unusual circumstances, then you can use probably file your taxes yourself. The easiest way to do this is with tax filing software like TurboTax, H&R Block, TaxAct, or similar.
You can follow the instructions in the app, enter all of the relevant information, and the software will calculate what you owe, prepare your return and schedules, and file your taxes for you.
If you’re a multi-member LLC, you’ve elected to be taxed as an S corporation, or you have unusual tax circumstances, then you will need an accountant.
You would provide the relevant information to your accountant and they will take care of preparing and filing your return.
I am not a qualified professional and I do not provide tax, legal, accounting, or similar advice. These guides are provided for informational purposes only. Always consult with a qualified professional on your unique circumstances. You can find more information in my disclaimer.