Ask the cubicle expat: Should I become an LLC?

February 13th, 2007

Risky BusinessKristen Fischer writes: “Lately I’m hearing tons of plusses and minuses about becoming an LLC. I’m a freelance writer and want to stay solo. Is this a good option for me? Why or why not?”

Great question, Kristen. Whenever I have a legal question, I turn to my free lawyer, Nolo.com. According to Nolo’s article on limited liability companies (LLCs), “If you’re concerned about being held personally liable for debts of your business, then an LLC may be just the thing for you.” Meaning if you’re worried about screwing up a job for a client who’s sue-happy or if you’re worried about incurring business debts that would jeopardize your home, car, or anything else of value you own, you might want to consider an LLC.

I write for a Colossal Software Corporation that would normally require me to be an LLC (that’s just their rule for those they outsource work to), but I bypass this requirement by working for a creative agency that acts as a middleman between me and the CSC. And since I have extremely limited business expenses — and therefore, less risk of business debt — and I’m pretty sure I’m not in danger of pissing off my editors and clients to the point of suing me, I’m not an LLC. I’m just a sole proprietor, like you. Forming an LLC can cost several hundred dollars and introduces a whole new level of administrative chores to business ownership (all of which you can read about here). For that reason, I have yet to go there.

For those who don’t go the LLC route and are still worried about losing their shirt, Nolo has this to say: “A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client’s back, your liability insurance policy should cover you.”

The bottom line is I can’t tell you what to do. Nolo can’t tell you what to do. Even this highly lauded career coach can’t tell you what to do. Your expenses, income, personal assets, and the level of riskiness of your work should all factor into whether you go the LLC route.

When I’m weighing a decision like this, I always talk to my accountant first. Yes, he’s a numbers guy, but he also knows a thing or two about business structures — particularly how changing mine will affect my taxes (and how much said change will cost me). And since I don’t have a lawyer to help me weigh such decisions, I’m likely to ring up one recommended by a writer pal and try to glean as much information as I can on the phone before s/he starts the meter (and I have to fork over $200+ an hour). Or I turn to my favorite free(ish) legal resources for creative types. Or I pester those kind folks at SCORE, who are so good at handing out free and sliding-scale business advice.

A couple more links that can help:

Good luck!

If you have a question you want the Cubicle Expat to answer, send it my way. Let me know if you want me to use your name and link to your site.

Entry Filed under: Ask the Cubicle Expat,Toolbox

5 Comments Add your own

  • 1. kristen  |  February 13th, 2007 at 1:56 pm

    thanks so much!!

  • 2. Michelle Goodman  |  February 13th, 2007 at 8:13 pm

    you’re welcome!

  • 3. SM  |  February 18th, 2007 at 12:47 am

    Know also that if you operate as a Sole Proprietor, you’ll have to pay a ‘self-employment tax’ — which is 15.4%!! I didn’t LLC because I thought it was too expensive, but having to fork over an additional 15.4% (!!) to the IRS is definitely not cheaper!

  • 4. Michelle Goodman  |  February 18th, 2007 at 1:44 am

    yes, the IRS calls the combination of your social security tax and medicare tax a “self-employment tax” when you’re a sole proprietor. BUT if you are someone’s employee, you would be paying half that — approx 7.5% of your income — anyway. so the difference is that you now pay the employee AND employer halves of your social security tax and medicare tax, since you are now both employer and employee. the increase in tax payment is actually 7.5% (or so), not 15%.

    going the LLC route isn’t going to get you out of paying these taxes. you’ll just pay them in a slightly different way given the legalities of your business structure.

    to make up for paying an additional 7.5% in annual income tax (the self-employment tax SM refers to), sole proprietors deduct business expenses and charge more per hour than they did as employee. we also itemize and deduct all business expenses, bringing our profit margin down, and in turn, reducing the amount of taxable income we make. and IRA (retirement fund) can further help here.

    if you do all this in a financially savvy way (and with the help of a good accountant), the self-employment tax shouldn’t be a big deal at all.

  • 5. stephen  |  April 30th, 2007 at 3:07 am

    I don’t see how its considered self employment TAX!

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Hi, my name's Michelle Goodman and I've been freelancing since 1992. I'm author of My So-Called Freelance Life and The Anti 9-to-5 Guide. Read my full bio here.

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