Should I Form an LLC As an Independent Contractor?
Now that you know you don’t need an LLC as an independent contractor, the next question you might have is whether you should form an LLC. The answer will depend on the type of business you are operating and the risk you are willing to take on.
Many independent contractors start as sole proprietorships—i.e., single-person businesses that don’t require the filing of formation paperwork. However, the owner often needs more support, structure, or risk protection as a business grows. While LLCs may require more time and money to operate, the benefits can be significant. Here are some of the key benefits of an LLC for independent contractor or freelance work.
Asset and Liability Protection
While independent contractors have significant flexibility regarding their work schedule and being their own boss, their personal assets and business may be at risk if they don’t use a protective business structure such as an LLC. Disputes, such as breach of contract claims or allegations of professional errors, can arise unexpectedly. Without an LLC, these risks can threaten your financial stability.
An LLC protects personal assets by creating a legal separation between the business and its owners. Typically, this means that if a client sues your freelance business or your company cannot pay its debts, only the assets owned by the LLC are at risk. Your savings, home, and other private property are generally safeguarded from claims, providing a critical layer of security.
Another advantage of an LLC is that the IRS allows you to choose the type of taxation your business will incur. As an LLC, you can elect to tax your business as a sole proprietorship, partnership, C corporation, or S corporation.
If you choose to have your business taxed as a sole proprietorship or S corp, the LLC’s income will be treated as personal income on your tax returns, and you will only be taxed once. This is referred to as pass-through taxation.
If you select being taxed as a corporation, your income from the LLC may be taxed twice, but at a lower corporate tax rate for a portion of the income. Or, if you select S corp taxation, you may save money on self-employment expenses and taxes. Each option can have advantages depending on what you are trying to accomplish and how much you want to reinvest in your business.
Additionally, several tax deductions may be available to reduce your taxable income.
Common deductions include:
Home office expenses—you may deduct a portion of your rent or mortgage, utilities, or maintenance expenses if you have a dedicated space at home for your business.
Travel—business-related travel expenses, including transportation, lodging, and food, may be tax deductible.
Equipment and supplies—costs for software, computers, phones, and other equipment and supplies used for your freelance work may be written off.
Professional fees—expenses for licensing fees, services like legal or accounting advice, and software subscriptions may be deductible.
Consulting a tax professional can help you maximize deductions while complying with tax laws.
Simplified Bookkeeping
Bookkeeping efforts can often be overwhelming for a freelancer. An LLC can simplify the process by clearly distinguishing between personal and business finances. Establishing a separate business bank account under the LLC allows you to consolidate all business- related expenses and income in one place. A separate account makes tracking and categorizing transactions easier and reduces the risk of mixing personal and business funds.
Enhance Your Business Reputation
Forming an LLC can elevate a freelancer’s reputation by signaling to clients that they operate as a legitimate and established business entity, not just a side hustle. This professionalism can build trust, attract higher-value clients, and make it easier to negotiate contracts or secure partnerships.
