Should you create an LLC as a freelance developer?
In this article, you’ll learn about which clothes your freelancing business should wear. Make no mistake—choosing the right business entity matters. And informing about this question by reading articles like this one may be one of the most important decisions in your professional life.
Disclaimer: I’m not an accountant but a programmer—so, you should consult with your accountant or lawyer before taking any conclusive action!
“A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.” (source)
So, if you create an LLC, you are generally not liable for any debt or liabilities of your freelancing business. Most likely, your freelancing business doesn’t need a lot of debt—after all, you’re selling your time for money—however, there may still be liabilities!
For example, you may have signed a contract that requires you to pay for all damages incurred by your software. Yes, you shouldn’t have done it—but assuming you have, if you signed in the name of the LLC, you personally cannot be hold accountable for the potentially devastating liabilities.
Pros vs Cons Table
What are some advantages and disadvantages of a liability?
|LLC Pros||LLC Cons|
|Limited Liability – If you keep your finances separate and fullfil your duties as a business owner, you cannot be personally held liable. Your personal assets like real estate, stocks, bonds, mutual funds will remain protected even if your business fails.||Limitations of Limited Liability – this is called “piercing the corporate veil” and it means that if you don’t follow the rules of the LLC, a judge may decide that your liability protection will be removed and you, personally, can be held liable.|
|Pass-Through Federal Taxation on Profits – Per default, the profits are not taxed on the company level but are passed through to its owners who then tax them individually. This is an advantage if you have a relatively lower tax rate and it avoids double taxation on the corporate and individual level.||Self-Employment Tax – Per default, you must pay self-employment taxes on the profits of an LLC because it is a pass-through entity.|
|Management Flexibility – The LLC can be managed by one or more owners. This is a perfect structure for partnerships where ownership percentages can be divided in a flexible way.||Turnover – If an LLC partner dies, goes bankrupt, or leaves the company, the company will be dissolved. You need to create a new one and you take over all the leaving partners’ obligations that result in dissolving the LLC.|
|Easy Startup Overhead – It’s relatively simple and cheap—a few hundred dollars—to start an LLC. For the amount of protection it offers, it’s a very cheap way to organize your freelancing business.||Investments – It’s difficult to raise outside capital. This is usually not a problem for you as a freelance developer because freelance developing has only minimal capital requirements.|
|Unproportional Profit Distribution – Members can receive profits that are not proportional to the ownership percentage they hold. This allows you to reinforce members for great work.|
|Credibility – Being an LLC gives you more credibility as a freelance developer. Clients tend to trust you more, as a freelance developer organized in an LLC, for two reasons: you’re an US-based business and you’re a serious business.|
Freelancer LLC Taxes
An LLC isn’t a federal tax designation but there’s a pass-through federal taxation on profits. This means that in most states, LLC aren’t taxed at all but the individuals who own them are. In other words, your tax designation is that of a disregarded entity that files taxes the same as a sole proprietor.
As a freelance developer, you probably don’t want to leave a lot of profits in the business, so the fact that it is pass-through doesn’t bother you at all. If you would like to build a business machine based on smart reinvestments of profits, feel free to read my detailed article about the topic or watch the following video:
Freelancer LLC or Sole Proprietorship
Sole proprietorship is the freelancer’s default business entity. If you don’t explicitly form an LLC or corporation, you’ll automatically operate as a sole proprietor. The main advantage of LLCs compared to Sole Proprietorships are that you’re generally not liable for debts or liabilities of your freelancing business. This protects your personal assets and reduces the likelihood of a personal bankruptcy in case of unforeseen liabilities that happened because of your business activities.
You can read more about the best legal entity for your freelancing business here.
Freelancer LLC or S-Corp
Per default, single-member LLCs are automatically taxed like sole proprietors as pass-through entities. The business isn’t taxed but you are. The S-Corp is just an alternative way you can choose to get taxed: You ask the IRS to tax your single-member LLC as an S-Corp. As a result, you don’t have to pay self-employment taxes anymore—but only income taxes on the corporate profits. This has a few advantages such as the tax deductability of the self-employment tax from corporate profits and the possibility to tax only a smaller portion of the overall profits.
You can read more in this excellent article:
Freelancer LLC Names
As a freelance developer, you need to decide on a business name. There are two types of restrictions: First, you cannot choose names that are already trademarked—or that are similar to trademarked names. Second, you cannot choose names that are already taken by other businesses. If you choose your business as your personal name, you usually don’t run into any legal problem. Some people argue that this can harm your scalability or prospects to sell the business. However, as a freelance developer, this is usually not a problem as you’d create a separate business for more scalable ventures anyways.
Delaware LLC Freelancer
Can you create a Delaware corporation as a freelance developer? According to international tax lawyer Jason Knott, the answer is: “Yes, a nonresident can form an entity in Delaware or almost any other state in the U.S.” If you succeed as a freelance developer creating a Delaware LLC, you reduce or even eliminate your income tax burden. However, this can be a complicated legal procedure and you should definitely seek expert advice.
Where to Go From Here?
Enough theory, let’s get some practice!
To become successful in coding, you need to get out there and solve real problems for real people. That’s how you can become a six-figure earner easily. And that’s how you polish the skills you really need in practice. After all, what’s the use of learning theory that nobody ever needs?
Practice projects is how you sharpen your saw in coding!
Do you want to become a code master by focusing on practical code projects that actually earn you money and solve problems for people?
Then become a Python freelance developer! It’s the best way of approaching the task of improving your Python skills—even if you are a complete beginner.
Join my free webinar “How to Build Your High-Income Skill Python” and watch how I grew my coding business online and how you can, too—from the comfort of your own home.