6 Mistakes Freelancers Make When Setting Up an LLCBy Allie Gray Freeland January 3rd, 2019
It doesn’t take long for freelancers to learn that clever writing and beautiful photos are not enough to sustain a career. Like it or not, being a business of one means, well, knowing your business. Many of us find this out the hard way when it comes time to incorporate as a limited liability company, or LLC.
An LLC is a common business entity with the characteristics of a corporation and a partnership. Some pros of forming an LLC include:
- Fewer formalities and legal requirements than other corporate structures
- No requirement to pay taxes on profits (Owners just pay pass-through income on their personal tax return)
- No liability for company debts
- Protection of personal property in the event of a lawsuit against the company
It sounds like a no-brainer, but the fact is, many freelancers make at least one of the following common mistakes when creating their LLC. And each can have far-reaching implications for both income and legal protections. Good news is, with a little foresight, and a few sticky notes, you can avoid the following errors and improve your bottom line.
1. Co-mingling bank accounts
Personal and business life shouldn’t mix—especially when it comes to finances. Many newbie LLC business owners make the mistake of cashing business checks into a personal account. In reality, you should separate business revenue in its own account. When you co-mingle accounts, you remove the legal protections your LLC offers.
2. Failing to document all financial activity
While LLCs shield you from many legal woes, the potential for an IRS audit isn’t one of them. Thus, it’s important to document any financial transaction through your business and account for any incoming business income. Look to the IRS’s small business portal for guidance on compliance. Using tax and bookkeeping software can help simplify the legwork.
3. Leaving out your business title when signing business documents
Sounds obvious, but it’s critical to use your business title (member, owner, partner, CEO) when signing any business document (even a check) so no one can argue that you signed in a personal capacity.
4. Incorporating in the wrong state
Delaware and Nevada are popular states to incorporate as a business because of their low income tax rate and favorable small business laws. While you can create an LLC in these states, it may be advantageous to incorporate in the state where your business has its physical presence. You’ll save yourself additional paperwork and out-of-state fees.
5. Underpricing your services
Your LLC makes you a bona fide business owner. It also means you’ll owe the government self-employment contributions for Medicare and Social Security, which traditional employees do not. Accommodate for this in your rate. Stay up to date on the going freelancer rates or use a freelance rate calculator to estimate what specific publications or verticals are paying. Then, as a general rule, add 10 percent to compensate for self-employment tax.
6. Doing it all yourself
You’re used to doing it all, but that doesn’t mean you should apply that thinking to business costs and tax law. Don’t be afraid to lean on an accountant to help you set up, operate, and manage your LLC’s finances. They know the tax codes and accounting standards that will protect your hard-earned money. It’s an investment, for sure, but for many, well worth it.
By not incorporating your business, you put personal assets on the line and miss the opportunity to work as a tax-advantageous freelance business. With a few guidelines in mind, it’s easy to build and sustain a flourishing LLC.
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