Me, LLC: Choosing Your Own Business Entity

Picture this: Your freelance writing habit is paying cash! This is starting to feel like a job, and you’re seriously thinking about going corporate.  But what exactly is a corporation?  “Inc.,” “LLC,” “LLP” … so many abbreviations!  What do they all mean?

The business entity: your imaginary friend

When people see an “Inc.,” the first words that come to mind are often “big” and “faceless.”  Can one person be a corporation?  The answer is Yes!  And she can be an LLC, an LLP, or (in some states) a PLLC as well.  Despite their many suffixes, all business entities serve the same basic purpose: they give a business the legal right to act as if it were a living person (your own imaginary corporate friend, if you will).  A business entity can rent an office, take out a bank loan, buy a laptop, draft a kick-ass beta product test review, and then cut its own paycheck.

Most important, in some cases creating a business entity can protect a business officer (that’s you) from personal liability in the event that, God forbid, the business should become insolvent or should default upon its obligations or should be accused of wrongdoing.  Judicial attitudes differ from state to state and from case to case, but courts are generally reluctant to “pierce the veil” and blame the business officer instead of the constructive business entity, so long as a proper entity was formed under the laws of the state, and the entity was doing business in its own name.

Inc. vs. LLC

Many freelance writers choose to organize a Limited Liability Company – “LLC” – rather than form a corporation – “Inc.” – for two main reasons: (a) to simplify taxes; and (b) because, in many states, LLCs are simply less work.

Double taxation
You may need an accountant to explain all the tax implications of forming a business entity.  Broadly speaking, however, when you form a corporation, your corporation is taxed on its earnings.  And of course you are taxed on your earnings (death and taxes, right?), hence double taxation.  Single-member corporations can simplify taxation at the federal level by filing as a Small Corporation, or “S-Corp.”, but freelance writers commonly opt for LLC status because it offers pass-through taxation, i.e., the LLC’s profits and losses are passed directly on to you.

Less paperwork.
The laws of your particular state will dictate the requirements for creating and maintaining business entity, but sometimes corporations can be a bit high-maintenance.  Generally, forming a corporation requires an incorporator, a certificate of incorporation, an organizational meeting, corporate bylaws, and a board of directors.

While many states allow small and single-member corporations to simplify these requirements, in many states organizing an LLC can be as simple as faxing one form to your Department of Corporations and paying a filing fee.  An annual report to your Department of State is also commonly required, but most single-member LLC organizers will probably agree it’s easier than calling a board meeting.

You gotta keep ‘em separated

Sound advice from The Offspring (Who, by the way, are not attorneys, nor should their observations or opinions be regarded as legal counsel).  Forming a business entity is just one step toward keeping the two elements of your life from getting all mixed together, like the salt and sugar packets in the break room (Arrgh!).  It’s your business checking vs. your personal checking; your business phone vs. your personal phone; your business email vs. your personal email; your business life vs. your personal life – this lawyer says life tends to be easier once you learn how to keep ‘em separated.

Image courtesy of Flickr, Pascal