Are you a freelancer who’s ready to officially form their own business? Congrats! Just keep in mind that there are several steps involved, one of which is to decide how you’ll legally organize your business.
Why is this such a big deal? Well, your choice has a big impact on how you’re treated by government agencies and how you’re taxed. Plus, the way you organize your business even determines if you’ll be held personally liable for your company’s debts.
Because there isn’t a one-size-fits-all option when it comes to legal entities, you might not know where to begin. But one of the most popular choices, especially for freelancers, is the limited liability company (a.k.a. LLC).
Here’s a guide to forming an LLC in Utah, including the benefits of organizing your freelance business as an LLC.
What’s an LLC?
LLC is one of the ways that you can legally organize and operate your business.
To form an LLC, you file a certificate of organization with your state’s business filing office. In Utah, that’s the Utah Division of Corporations.
Then, as an owner, you’ll be referred to as a “member,” and can invest money and/or services in your LLC in exchange for a percentage of ownership.
Although an LLC can have one member or several members, if you’re a freelancer running a one-person business, you’ll be a single member LLC (also known as an SMLLC).
Once it’s legally formed, your LLC is its own entity, with an existence separate from your own. Kind of like giving birth to your own LLC baby.
Here are the basics:
Your LLC is considered its own legal “person,” which means it can do pretty much anything that an actual person can do, like:
- Own property
- Be sued and sue others
- Manage bank accounts
- Borrow funds
- Hire workers
What are the benefits of an LLC?
If you’ve been working as a full-time freelancer for a while, you might be wondering why you should bother forming an LLC, or any other formal business entity. You’ve gotten this far, haven’t you?
Before you decide to keep freelancing on your own, here are a few of the benefits of forming an LLC:
It’s simple to run your business
LLCs are easy to run. In fact, they’re actually surprisingly simple.
If you were to create a corporation, you would have to hold and document regular and special shareholder meetings in order to do business. Can you say paper work nightmare? With an LLC you don’t have to do any of that. Paper free office here we come.
Limited liability
As the name implies, a limited liability company provides you with…drum roll please… limited liability.
This means that you won’t be held personally responsible for paying:
- LLC business debts that you haven’t personally guaranteed, including most routine bills for supplies and equipment
- Injuries (not covered adequately by insurance) that are suffered by people who are hurt by your LLC’s business activities
Who’s going to pay for these business debts and injuries? Your LLC.
Basically, only your LLC’s assets and money can be taken to cover these costs. And that means that creditors won’t be able to touch your personal assets, like your real estate and bank account.
Also, only LLC assets can be used to pay off business debts. That means that you, the owner, would only lose the money that you’ve invested in your business. Again, your personal assets are protected. That’s a relief!
But, we should mention that, even if you form an LLC, you’re still personally responsible for your own wrongdoing, such as professional malpractice or fraud. So keep that liability insurance policy, just in case.
Tax benefits
Protecting your personal assets by separating them from your business is one of the main reasons so many freelancers form an LLC. But beyond that, an LLC is also great come tax season.
Here’s what you need to know about taxes and LLCs:
- LLCs aren’t recognized by the IRS for tax purposes. Single member LLCs are referred to as “disregarded entities.”
- LLCs can be taxed the same as a sole proprietorship, a partnership, or a corporation.
- You, the single owner, decide how you want to be taxed, and that gives you a lot of flexibility. Whether you want to be taxed like a sole proprietorship or a corporation is up to you.
Sole Proprietor Taxation is the default tax treatment for single member LLCs, and also the most common.
- As a single member LLC taxed as a sole proprietor, you’ll file Schedule C, Profit or Loss from Business, when you file your tax return.
Yep, it’s the same form you’ve been using as a freelancer all along! Just list all of your business income and deductible expenses. Pay income tax at your individual tax rates on any profit your business earns. Pretty straightforward, especially when it comes to paying taxes while running a business. - Another reason why sole proprietor taxation is popular is because you aren’t considered an employee of your LLC. Rather, you’re the self-employed business owner.
This means that your LLC doesn’t have to cover payroll taxes on your income, or withhold income tax or Social Security or Medicare tax from your LLC’s profits. But you do have to pay income taxes and self-employment taxes (Social Security and Medicare taxes) on your LLC’s net income. - Filling out a Schedule C means you’re entitled to the same tax deductions as any other business, such as expenses to cover mileage, equipment, and more.
- Beyond regular business deductions, you also might be able to take the new pass-through tax deduction, which is available to sole proprietors. The pass through deduction went into effect in 2018, and it’s set to last through 2025 (as of the time of this writing. Things could change, so it’s best to stay informed about the latest tax laws).
If you qualify, you might be able to deduct up to 20% of the net income you earn from your LLC from your income tax. This effectively reduces your income tax rate on your LLC profits by up to 20%. Sweet!
Corporate Taxation is your other option if you don’t want to be taxed like a sole proprietor anymore. If you take this route, your LLC will be taxed just like any other corporation.
- To be taxed as a corporation, you’ll file a document known as an “election” with the IRS. You can elect to have your LLC taxed like a regular C Corp or S Corp.
- Is corporate taxation common amongst freelancers? Truth be told, not really, especially when it comes to single member LLCs. But, because the corporate tax rate is lower than it used to be (and, again, that could always change in the future), more business owners might choose to take this route.
Comparing LLCs to Other Types of Businesses
If you still aren’t sure about whether an LLC is right for your freelance business, you also have the option of operating as a sole proprietor or a corporation.
Weighing the pros and cons of each of these options will steer you in the direction that’s best for you.
Sole Proprietorships
A sole proprietorship is the default business entity for a one-person business. Basically, it comes into being automatically once you start working as a freelancer and earning money. Doesn’t get much easier than that!
A sole proprietorship isn’t a separate legal entity. This means that you, the business owner, personally own all of the assets, and are in charge of the day-to-day operations.
You report the income that you earn, as well as the losses that you incur, on your personal tax return. Then, you pay tax on any profit at your individual tax rates. Translation: no limited liability perks.
You’ll be held personally responsible for all of your business debts and any business-related lawsuits. Now that could be scary!
Corporations
When you set up a corporation, your business becomes its own legal entity. It’s formed when you file articles of organization with your Secretary of State, or related business filing office, just like you’d do when forming an LLC.
Like an LLC, your corporation has a legal existence separate from its owners, so it’ll be considered a legal “person.” Translation: you get limited liability perks. Woohoo!
A corporation is owned by its shareholders, who invest money and/or services in exchange for stock. A corporation must also have one or more directors who are ultimately in charge. And it must have officers who run daily operations.
If you’re a one-owner business, though, you can be the single person directing and running the corporation, and you can own all of the corporate stock.
You’ll work as an employee of the corporation, in addition to fulfilling your other corporate roles. As mentioned above, this differs from LLC members, who aren’t employees of their businesses for tax, unemployment insurance, workers’ compensation, or other legal purposes.
What does this all boil down to? A corporation could cost more than an LLC to operate if it has to pay for unemployment insurance and workers’ compensation coverage for employees.
There are two types of corporations
- When you form a corporation, it automatically becomes a C Corp (regular corporation) for federal tax purposes.
This is the only type of business that isn’t a pass-through entity. Instead, it’s taxed separately from its owners. A C Corp has to pay income taxes on net income and file its own tax returns with the IRS. It also has its own income tax rate.
Another thing to consider: C Corps are subject to double taxation. Any direct payment of profits to shareholders is considered a dividend by the IRS and taxed twice.
First, the corporation pays corporate income tax on the profit, at whatever the corporate rate is, on its own return.
Then the shareholders pay personal income tax on the money they receive, at the capital gains rate (higher income shareholders might even have to pay an additional Medicare tax).
All of this could add up to more than the tax an LLC member would pay on the same amount of profits. But you could avoid double taxation by paying all profits to employee-shareholders in the form of salary, benefits, and bonuses.
- As a corporation, you have the option of being taxed as an S Corp (small business corporation) instead, which is considered a pass-through entity.
This means that corporate income or losses are passed directly to shareholders who divide the taxable profit according to their shares of stock ownership. Then they report that income on their individual tax returns, avoiding double taxation.
How Much Should You Expect to Pay?
Like other aspects of forming and operating an LLC, rules for fees can vary by state. Utah filing fees for forming an LLC include:
- $70 to file a certificate of formation with the Utah Division of Corporation’s office
- $18 to file an Annual Renewal with the Utah Division of Corporations (this must be filed every year after the first year)
You might also need to get other local and state business licenses and pay a fee for those. That will depend upon the type of work your LLC does, and where your LLC is located.
Also, don’t forget that there might be additional fees involved with performing a thorough LLC name search to figure out if the name you’ve chosen for your business is actually available.
- Reserving an LLC name for up to 120 days will cost $22
- A professional trademark search will cost anywhere from $30-500 for each trademark searched
Click here to read our “Freelancer’s Guide to Trademark Research” for more information.
More Fees to Consider – Oh My!
Forming an LLC can get pricey pretty quickly.
Ultimately, how much it costs to complete and file all of the necessary paperwork depends on who does the work.
Will you be doing it all yourself, perhaps with the help of a book? Then you’ll need to pay the legal costs of your state, and invest a lot of time and effort into the process.
If you end up using an online LLC formation service, you could pay up to $300.
And if you hire an attorney, expect to pay anywhere from $500 to over $1,000.
You also need to designate someone to accept legal papers for your LLC. And, while you can take a DIY approach, it’s best to use a professional registered agent. How much will that cost? About $75-150 annually. Ouch!
For more information, check out our “Freelancer’s Guide to Registered Agents”
Note: Even if you hear rumors about the advantages of forming an LLC outside of Utah, keep in mind that most of those benefits aren’t all they’re cracked up to be, especially if you’re a single-member LLC. In the end, if you were to form your LLC in another state, it will likely cost you more money because you’ll have to pay two filing fees.
A Smarter, More Affordable Way to Form Your LLC
By now, your head is probably spinning with everything you’ve discovered about LLC forms, fees, and taxes.
But, don’t worry. Collective is here to help. Collective is the first all-in-one financial solution for self-employed people. We take care of your LLC formation, taxes, monthly bookkeeping, accounting and more.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.