Why Should I Form an LLC as a Freelancer or Small Business Owner?

There are many benefits to having an S-Corp LLC, especially tax advantages and legal protection.

At Opolis, you’ll need a Limited Liability Company, or LLC, to join the Employment Commons. It will be treated as an LLC for state tax purposes and will be treated as an S-Corporation for federal tax purposes. Luckily, we’ve created this handy guide with help from LegalZoom to help you learn more about what an LLC is and how to form one with your freelance career or small business.

What Is an LLC?

A Limited Liability Company (LLC) is a type of business organization allowed by state law. The LLC was mainly created to limit personal liability of the owners (like a corporation), but also to allow the business to be taxed like a partnership. Those who own the business are called members (comparable to shareholders in a corporation). The members select managers, who run the day-to-day operation of the business (comparable to corporate directors and officers). Of course, in a small LLC, the members and managers may be the same person or people.

Why Do I Need an LLC?

Whether you are about to start a business, or have been operating as a sole proprietor or a partnership, you probably want to know: “Why do I need an LLC?”

When choosing the form of your business, numerous considerations come into play, including personal liability, ownership and management, cost of forming and registering the business, and taxation. Ultimately, having an LLC as an Employment Commons member will help you protect your business and set you up for success with Opolis’ automated financial options.

Reasons to have an LLC include:

• Limiting your personal liability for business debts. With an LLC, only the assets owned in the name of the LLC are subject to the claims of business creditors, including lawsuits against the business. The personal assets of the LLC members cannot be claimed to satisfy business debts. For most people, this is the most important reason to form an LLC.
• Requires fewer formalities. Unlike with a corporation, you aren’t required to have a board of directors or shareholders with an LLC. You have more options in setting up your management structure.
• Raising capital from investors. This can be done by bringing in other members who contribute funds, property, or services to the business.
• Tax advantages. There is usually no separate tax levied on the LLC itself, as there may be with a corporation. LLC profits or losses are generally passed on to the members, as they would be with a partnership.

How Do I Form My LLC?

The details of forming an LLC vary from state to state. Generally, you will create an LLC operating agreement setting forth the rights and duties of the members and managers (similar to articles of incorporation), file certain forms with the appropriate state agency (often the Secretary of State), and pay a filing fee.

What Is an S-Corp?

The difference between a sole proprietor LLC and an S-Corp LLC comes down to taxes. Income generated by an LLC is considered taxable personal income. In an S-Corp, you can deduct business expenses from a company’s taxable income. An S-Corp filing is also what allows you to pay yourself a wage and deduct the employer taxes as a business expense. As an Employment Commons member, you’ll need to choose the S-Corp option when setting up your LLC.

Here are a few key similarities and differences to note between sole proprietor LLCs and S-Corp LLCs:

Similarities

• Limited liability protection. Business owners are generally not personally responsible for business debts and liabilities.
• Separate entities. LLCs and S-Corps are separate legal entities created by filing papers with the state.
• Pass-through taxation. Both are generally pass-through tax entities, but S-Corps must file a business tax return. An LLC must only file a business tax return if there is more than one owner.
• Ongoing state requirements. Both are subject to state-mandated requirements, like filing annual reports and paying the required fees.

Differences

• Members: LLCs can have any number of members; S-Corps must have 100 shareholders or fewer.
• Citizenship/Residency: LLC members don’t have to be U.S. citizens or residents. S-Corp shareholders must be citizens or residents.
• Self-employment taxes: This is the big one! S-Corps have more advantageous self-employment taxes than sole proprietor LLCs. S-Corp owners can be considered employees and paid “a reasonable salary.” By paying yourself a “reasonable salary,” all income above that reasonable salary, you can take as a distribution saving yourself social security and Medicare taxes, effectively saving yourself a little over 15%. FICA taxes are taken out and paid on the amount of the salary. Corporate earnings after salary may be able to be treated as unearned income that will not be subject to self-employment taxes. This is the fine print, but remember, with Opolis’ Employment Commons, your necessary tax remittances are easy and automated!

Ready to get started but still have questions? Talk to a member specialist and enroll on our website.