As a freelancer, managing your finances while juggling multiple clients can feel overwhelming.
But what if there was a way to protect your personal assets, save on taxes, and make your business look more professional?
That’s where forming an LLC (Limited Liability Company) may help.
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Let’s take a closer look at the top financial benefits of starting an LLC tailored specifically for freelancers like us.
What are some of the top financial benefits of starting an LLC as a freelancer?
Starting an LLC as a freelancer can help protect your assets and optimize your tax savings. Below, I’ll go over why I love having an LLC and how this decision may benefit your freelance business.
1. Limited liability protection
One of the biggest reasons freelancers choose to set up LLCs is for asset protection planning purposes.
If a client ever sues you, your personal assets would typically remain safe under an LLC. Without this protection, your personal finances could be at risk.
This distinction between your personal and business liabilities offers peace of mind as you grow your business.
2. Potential tax savings
Another financial benefit is the flexibility in tax treatment. As an LLC, you can choose how you want to be taxed. You can be a sole proprietor, partnership, S-corporation, or even C-corporation.
If you opt to be taxed as an S-corporation to reduce your self-employment taxes, you can pay yourself a fair salary and take the rest of your profits as distributions. These distributions are not taxed as self-employment taxes.
If lowering your tax burden is a priority, this might be the best route for you.
3. Business expense deductions
Forming an LLC makes tracking business expenses much simpler.
Since I did, I can write off various expenses like travel, equipment, and even my home office. These deductions lower my taxable income, which means I keep more of what I earn.
For example, I needed a new laptop last year and attended two industry conferences. Everything was deductible, from the plane tickets and hotel to my meals and conference merch.
My taxes were simpler, and I had a nice big write-off and leveled up my professional skills. I wish I’d done it sooner!
4. Credibility and potential client trust
Clients tend to take freelancers more seriously when they operate under an LLC. It gives your business a level of legitimacy that a sole proprietorship lacks.
Higher-paying clients may be more willing to work with you because they see your business as established and professional. This was certainly the case for me. This credibility can give you an edge over other freelancers who don’t have a formal business structure.
5. Flexibility in profit distribution
An LLC also provides flexibility in how you distribute profits. When you first start out, you might want the option to decide how much you’d like to allocate to yourself and how much to reinvest in the business.
This flexibility can be beneficial if you plan to bring on partners in the future or just want more control over your finances.
6. Easier access to funding and credit
You may find it easier how to get a business credit card and other lending products when you
establish an LLC. This is super helpful for separating your personal and business expenses, which:
- Could lead to better loan terms in the future.
- Helps you build business credit.
- Makes bookkeeping easier.
One of my favorite things about business credits? Access to perks like cash back or travel rewards. These add up fast and can help you cut down on expenses if you travel often.
7. Retirement plan contributions
As an LLC owner, you may be able to set up a Solo 401(k) so you can contribute to your retirement savings. This is another significant financial benefit for freelancers.
Unlike W-2 employees, you can contribute both as the employer and the employee. This increases your annual contribution limit. It’s a great way to reduce taxable income while saving for the future.
I haven’t started this just yet, but it’s high on my priority list!
8. Pass-through taxation
Many freelancers worry about double taxation, but with an LLC, you can put that worry to rest. The profits of an LLC pass through to your personal income tax return, meaning you won’t pay federal taxes at the business level.
This prevents you from facing corporate taxation, allowing you to retain more of your profits. It also simplifies things and makes it more straightforward to manage your income and tax liabilities. Believe me, when it comes to business taxes, simpler is always better.
9. Qualified business income (QBI) deduction
One of the unique tax benefits of operating as an LLC is the Qualified Business Income (QBI) deduction.
Eligible freelancers can deduct up to 20% of their qualified business income.
It’s a huge tax saver that W-2 employees don’t have access to. This helps you keep more of your income and reinvest in growing your business.
10. Health insurance deductions
When I launched my LLC, I discovered I could deduct health insurance premiums, which was a big help. US-based freelancers often face high healthcare costs — but if you meet specific criteria, you can deduct those premiums from your taxable income.
This is a great way to lower your overall tax bill while covering an essential expense.
11. Flexible profit-sharing options
Another financial advantage of forming an LLC is the flexibility in how you split profits.
This is especially helpful if you have partners or plan to take on investors. You can allocate profits based on contributions or workload (which is often better than a strict ownership percentage). This flexibility can change everything when you’re managing financial relationships.
12. Asset depreciation
If your freelance business requires expensive equipment like computers or software, you can depreciate those assets over time.
This is a tax-saving strategy many freelancers use to lower their taxable income. Asset depreciation lets you pay for big-ticket items over several years. This can improve your cash flow and reduce your tax liabilities each year.
13. Flexible fringe benefits
Finally, an LLC can offer flexible fringe benefits like disability insurance or educational assistance. These are tax-free for employees (including yourself, if applicable).
They reduce your taxable income and let you enjoy perks that individual freelancers can’t typically access.
It’s just another example of how forming an LLC can help maximize your financial opportunities.
How to know if an LLC is right for you
Deciding whether an LLC is the best structure for your freelance business depends on a few key factors.
Here are some questions to consider when making that decision:
- Do you want personal liability protection? If protecting your personal assets is essential to you, forming an LLC may be a smart choice.
- Are you planning to grow or take on partners? If your business is growing or you’re thinking of bringing on partners, an LLC offers flexibility that a sole proprietorship doesn’t. You can easily add partners or investors without having to restructure your business.
- Do you want flexibility in taxation? An LLC gives you more options for how you’re taxed. You can choose to be taxed as a sole proprietor or elect to be treated as an S-corporation or C-corporation — depending on what benefits your business the most.
- Are you looking for more credibility? Operating as an LLC can make your freelance business look more legitimate to potential clients. It’s especially helpful if you’re trying to attract higher-paying clients.
More things to keep in mind as a new freelancer
As you start your new freelance journey, consider the following factors to help streamline your path to success.
Using loans to fund your new freelancing business
Understanding how to manage your startup costs is pivotal to starting your new business strong.
If you’re considering personal loans to help handle these costs, budget carefully.
Personal loans can provide quick access to funds, which can be beneficial when cash flow is tight. But it’s important to understand your monthly payments and overall costs to make sure it’s right for you.
I like to use a personal loan calculator to check how different loan amounts and interest rates could affect my budget. It shows me possible monthly payments and total costs so I can easily decide if a personal loan fits into my budget.
Using formation services to set up your LLC
If you’re considering forming an LLC, I recommend using Tailor Brands—it’s the best LLC formation service I’ve encountered so far.
The team guides you through the entire setup process and helps make sure all paperwork is correctly filed.
When you’re busy trying to get your freelance business off the ground, having a registered agent to minimize the stress makes a world of difference.
Networking to fast-track freelancing success
Finally, building a professional network can significantly impact your freelance success. I can’t tell you how many opportunities I’ve gotten access to because I spent time building relationships!
Waseem Jaban, CEO of Delta Remedys, also emphasizes the importance of connections:
“My partner and I come from an engineering background, and so do many of our peers, where fellow engineers and our mentors happen to be professors in universities. In business, like many other things in life, it is about who you know. Building a network of people that both parties can benefit from when a job needs to be done is vital.”
Wrap up
An LLC can offer significant advantages, but it’s not the right choice for everyone.
If you prioritize simplicity, low upfront and ongoing costs, and have a small or low-risk business, a sole proprietorship or another business structure might be a better fit.
Similarly, if you plan to scale by raising capital from large investors, a C-corporation could be a more strategic option. The key is balancing your liability protection needs, tax flexibility, growth potential, and simplicity when deciding on the best business structure.
That’s why I highly recommend using a registered agent or meeting with an advisor for support. They’ll help you decide which option is best for your business based on your specific goals.
PS: Craving more helpful resources for freelancers? Millo is jam-packed with useful guides, tutorials, and courses. Learn more about how it works now.
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