In recent years, a growing number of people have turned to freelancing as a way to earn a living. Starting a freelancing business can be a great opportunity with many benefits, including flexibility and independence.
One important decision that freelancers have to make is how to structure their business. More specifically, whether they should operate as a sole proprietor or form an LLC. Here we discuss why freelancers should consider forming a Delaware LLC for their business.
Why Freelancers Should Form a Delaware LLC
Freelancers should form a Delaware LLC instead of operating a sole proprietorship for several reasons.
1.) Limited Liability Protection.
An LLC provides business owners with limited liability protection, which shields their personal assets from any debts or legal liabilities associated with their business.
Freelancers in high-risk industries can benefit greatly from limited liability protection against accidents or legal disputes. Forming an LLC can protect a freelancer’s personal assets, such as a house or car, from lawsuits that may arise from their business.
Operating as an LLC may make a business seem more credible. Potential clients and customers may perceive companies formed as LLCs as being a more established business and more trustworthy than a sole proprietor. Increased credibility can be beneficial to freelancers, leading to more opportunities and higher paying clients.
Banks, investors and businesses all over the world widely recognize Delaware LLCs. Forming a Delaware LLC may signal that a business is reputable and well structured.
3.) Tax Advantages
Delaware LLCs are more flexible when it comes to taxes compared to sole proprietorships. The sole proprietorship owner can select to be taxed solely as a disregarded entity, which is alternatively known as a “pass-through” entity.
The owners of a Delaware LLC can choose to have their LLC be taxed as a disregarded entity (similar to a sole proprietorship), a partnership, a C-Corporation or an S-Corporation.
An LLC’s ability to make corporate tax elections can come with distinct advantages for certain types of businesses. For example, an LLC taxed as C-Corporation is able to roll forward financial losses. This allows a company to account for some of its previous losses in future periods and avoid paying income tax on newfound profits.
4.) Easy to setup and maintain.
There are also minimal requirements to maintain a Delaware LLC. This makes Delaware LLCs a great option for freelancers who need to focus on work rather than legal or administrative tasks. All a Delaware LLC needs to do to be compliant is pay the Delaware Annual Franchise Tax. The Delaware Annual Franchise Tax is a flat fee of $300 due each year that the LLC is in existence.
5.) Easy to transfer ownership.
Forming a Delaware LLC also makes it easy to transfer ownership of the business in the future. As a freelancer begins to grow their business and take on bigger clients, they can easily bring partners into the LLC.
What is a Sole Proprietorship?
A single individual owns and operates a sole proprietorship. A sole proprietorship is not an incorporated business entity, meaning that the owner is not separate from the business. The owner of a sole proprietorship is personally liable for any debts or legal liabilities related to their business.
You do not need to file any paperwork at a federal, state or local level to become a sole proprietor. As soon as you start conducting business, you become a sole proprietor.
A sole proprietor is able to obtain an Employer Identification Number (EIN) from the IRS and can hire employees and independent contractors. The IRS considers a sole proprietorship as a disregarded entity for federal tax purposes. The income generated by a sole proprietorship passes through to the owner’s individual tax return, and it is not taxed directly.
What is a Delaware Limited Liability Company (LLC)?
A Delaware LLC is a type of business entity that offers limited liability protection to its owners. This means that the company’s debts and liabilities cannot reach the owner’s personal assets. LLCs create a layer of legal separation between a business and its owners, who are called “Members”.
Forming an LLC requires publicly filing a formation document with the Secretary of State’s office. In Delaware, the formation document only requires the name of the LLC and the information about the company’s Delaware registered agent.
People use Delaware LLCs for various purposes because they are versatile business entities. These purposes range from a one-person consulting business to multi-million dollar commercial properties. Businesses use Delaware LLCs to protect tangible assets, like real estate, and even intangible assets like trademarks and intellectual property.
Why Form an LLC in Delaware?
Delaware is one of the most popular states for forming LLCs. Over 1.3 million Delaware LLCs have been formed as of 2021 according to the Delaware Division of Corporations. A business-friendly legal environment, low fees, and fast filing times make Delaware a preferred choice.
The laws of the state where LLCs are formed govern them, and Delaware’s business laws are known for offering the strongest protections to owners and managers. Delaware’s dedicated business court, called the “Court of Chancery”, resolves disputes quickly and respects the rights of business owners.
There is no residency requirement to form a Delaware LLC, meaning entrepreneurs can take advantage of Delaware law from almost anywhere in the world. You do not need to have an office in Delaware or even visit Delaware to form a Delaware LLC.
While operating as a sole proprietor may be simple and inexpensive, forming a Delaware LLC can provide freelancers with better protection, credibility, and potential tax advantages. When combining these benefits with how easy the formation process is, freelancers should consider a Delaware LLC to take their business to the next level.