LLC vs S-Corp for Freelancers
Last month we discussed the financial woes of maintaining a freelance style professional career. As a dancer I generate income working gigs- a tv show, a party or a performance with an artist. My dance life brought on this blog which sometimes generates income when a company asks me to share my thoughts via social media or a long form article. This brings me to the evolution of a third (developing) source of income- my very own consulting/digital production company specializing in sport. I explain all this because it seems like whatever I do, I will not escape this freelance lifestyle. The more I do, the more complicated my taxes get. The more I do, the more intense my risk for liability becomes. I finally decided if I want to be legit, it’s time to get legit and get a grasp on what my options are for registering myself as a business entity. In life and on Bumble Bizz, it’s about making the first move. I headed to Bumble Bizz professional networking app to reach attorneys, lawyers, small business owners and fellow freelancers to gather their opinions…. and there were many.
In polling all of these Bumble professionals, our conversations always ended with “but you should definitely speak with your accountant and lawyer in making this decision”. If you are like me, that sentence alone is completely daunting. What lawyer? What accountant? And with what money am I paying them? Enter Framework Law Group. Framework is dedicated to business legal and is made for budding entrepreneurs like you and me. They served as my one stop shop for legal, accounting and insurance set up and have packages and payment plans to help.
I met with Managing Attorney at Framework Law Group Grant Atkinson and learned that there are two major reasons freelancers like you and I should register our businesses. First is to limit our liability.
As a disclaimer, I am not a lawyer or an accountant and all the information in this article is just based on my take-aways from conversations I had with Bumble users, Framework and their colleagues. You should not rely on any of this as advice and should consult with a lawyer or an accountant to make decisions for your business.
LIMITED LIABILITY PROTECTION
Grant explains, “When you conduct business through a separate legal entity, you can avoid personal liability for business debts and damages, which decreases the risks associated with running your business.” So this basically means, if some day I misspeak about a company or give a brand the wrong advice and they want to sue me, without a registered business entity they can come after everything I have (car, home, Prada, sneaker collection) vs everything that’s in the business. Grant added "If your business is exposing you to higher levels of risk, then I definitely recommend operating your business through a separate entity. This includes selling food, drinks, certain products, having a brick and mortar location, or providing services with higher levels of risk exposure.” Limited liability gives you some separation from your business and a sense of security.
The second, more exciting reason to register your business is potential tax savings. Grant explains, “Depending on your income level, you may save money on taxes by channeling your income through your business entity.” This where it gets tricky and very specific to your own situation but this basically means, if you generate enough money as a freelancer, you can ultimately save money by restructuring how you do your taxes via whichever legal entity you enter. For any entertainer reading this, tax savings is usually the driving factor for becoming a business. I will get more specific below.
LLC is easy as 1, 2, 3.
People love LLCs because they are inexpensive to establish and easy to set up and maintain. Paperwork is limited and there can be as many owners of the company as you’d like. This fact doesn’t apply to my current situation, but some day if my consulting/production business takes off and I’d like to have a partner, we can share the company. You get the liability protection as explained above however, LLCs are generally taxed as sole proprietors (which is how you’re being taxed as a non-business). This means unless you elect to be taxed as a corporation (a whole other can of worms) you will be taxed on all the income you make.
List of possible expenses include:LLC Registration, Business License with your City, Annual Tax Payments, Liability Insurance, Disability Insurance and Worker’s Comp
With an S-Corp you get the same liability protection as an LLC, but people love it because of the savings on Self-Employment tax. Whether you have an employer or you are self employed, everyone pays the government Medicare and Social Security tax. If you are employed, your employer pays a portion of these taxes and you pay the other. If you are self employed, you pay both portions (ugh). With an S-Corp, you are in essence the boss and pay yourself (and eventually your employees) a salary. Say I make $100,000 per year and I decide to pay myself $45K as a salary and the other $55K remains in the business as a “distribution”. You still have to pay the self-employment tax on your $45K salary, but the $55K is taxed by the lower (non-self employment) rates. Veronica Frausto, a colleague accountant for Framework Law Group punched in these hypothetical numbers and the tax savings would be $8415 if the income passes through a S-Corp. Oh HELLO!
BUT S-Corp gets a bad rap because there are extra fees and upkeep involved compared to an LLC. You must set up payroll which incurs monthly fees, prepare yearly minutes on behalf of the corporation and there are yearly fees and licenses that all add up.
List of possible expenses include: S-Corp Registration, Payroll, End of year separate tax filing fee (one for you, one for your corporation), Business License with your City, Liability Insurance, Disability Insurance and Worker’s Comp
I decided (drumroll please,) to become an S-Corp. There were a few deciding factors, first being the potential tax savings after Framework punched my numbers through. In my case, my potential tax savings well outweigh all of the fees and I will enjoy a sizable savings. Second, Veronica said that if I were only consulting that she would have considered an LLC format for me, however since I have multiple revenue streams a corporation was the most efficient way to tie it all together. Third, I always have the power to dissolve the business. While my income has been stable the past few years, in classic freelance style you never know when you’ll hit a bad year. I expressed my fear of getting stuck in a corporate structure with lots of fees and not meeting that income threshold that makes it worthwhile tax wise. If this happens, I have the freedom to not run my money through the corporation. Lastly, I sat with the idea that I could of course, elect to remain an independent contractor or simply become a sole proprietor. In the end, I know I don’t legally have to formalize this, but if I don’t take that step and have the faith that I can grow larger and work wider then who will take it for me?
No situation is as simple as this article so again, I urge anyone looking to make this decision to involve a team like Framework Law Group and source professionals in your local network on Bumble Bizz. While you don’t need to become an official business entity to find success in the freelance world after years of stumbling my way through taxes and enduring growing liability, it was time for me to step it up.
This article was sponsored by Bumble Bizz but the views are all my own.