Being a tax guy in New York City, I hear a lot about freelancers setting up their own LLC’s or filing for D.B.A.’s. While these sound really professional and can make you look legit it’s a decision too often made on a whim. Understanding the all the in’s and out’s before filing anything can save you a lot of time and money. Here are some key pointers around LLC’s and “incorporating” in general.
You don't need a LLC to start a business. If you’re starting a new project all by your lonesome or just picking up some freelancing gigs then you’re called a sole proprietorship. There are no filings or fees. Just snap your fingers and you’re done. But as the name suggests, only you can be an owner.
LLC vs. DBA (“doing business as”). This sounds simple and intuitive because it kinda is: A DBA is only a name but a LLC is its own actual legal entity. To put it in other words, if someone sues a LLC they can only go after the LLC’s assets (i.e. your personal assets have protection.) If someone sues a person using a DBA they’re suing the person which means all their personal assets are fair game - home, car..all of it (minus some exclusions we won’t get into here.) So legal protection is a key difference (however see #3). LLC’s are also more expensive and require more filings and fees. In short, don’t get an LLC unless you need it and if you do, consider the alternatives.
LLC’s aren’t all they’re cracked up to be. If you’re the only owner (Member) of a LLC it’s referred to as a Single Member LLC or SMLLC. Recently some states have been denying SMLLC’s legal shell, opening the owner’s personal assets to potential risk - a concept called “piercing the corporate veil.” One of the main reasons to create a LLC in the first place is legal protection! This alone should cause you to rethink LLC’s.
Also, If you live in NY there’s an archaic publishing requirement that can be as costly as it is ridiculous, especially if you live in the city.
And there are entire tax courses about the tax differences between LLC’s, S Corps, and other types so I won’t even begin to bore you there. Trust me - I’ve taken plenty in grad school.
4. Why are you incorporating in the first place? If the answer is “someone told me I should” or “isn’t that what everyone does?” then you’re probably making the wrong decision. There are different types of companies for all kinds of reasons - none of which are the aforementioned.
This is a super broad guide just to paint a picture for someone starting out in freelancing:
a. I just want to sound professional - Get a DBA and an EIN.
b. I’m making a good living freelancing - Get an S Corp
c. My partner(s) and I are starting a business but some are more into it than others, we need flexibility and it has to be cheap - Maybe go LLC here but consider an S Corp (clearly I really don’t like LLC’s.)
d. I hope to get investors one day, pay people in stock, save the world with an app, go public, all that jazz - C Corp.
5. Ask a pro BEFORE doing anything. Bouncing a few questions off a CPA can pay for itself multiple times over. Trust me - it’s what I do. Think I’m biased? Well, yeah, but if you screw up that means more work for me cleaning up the mess, more billable time, more fees for you… People helping people, folks.
**Please read disclaimers from my 1st post regarding legal and tax advice**