When I made the move from freelancer to starting a content development agency, the decision of which type of business to form was an easy one. I went from being a sole proprietor to being the co-owner of a limited liability corporation (LLC).
Why we chose to go with an LLC had a lot to do with the state where we’re based — Texas. Say what you will about the state, but Texas is one of the most small-business friendly states. Also, there’s no state income tax. And we have awesome barbecue. But I digress.
Aside from the legal and financial reasons for making that choice, creating an LLC — and in general, becoming a more formal business entity — offered other benefits directly related to our business over and above our business filing. If you think you’re ready to upgrade, an LLC may be just the thing to help you gain more credibility, more clients, and yes, more revenue.
What’s the Difference Between a Sole Proprietorship and an LLC?
If you’re a freelance writer, you’re already a sole proprietor. (You’re paying your quarterly estimated tax, right? Right?!) Although you likely didn’t have to actually file any papers or pay any fees to claim that status, sole proprietorship is recognized by the IRS. It basically means you as an individual and you as a business are one and the same, and you’ll encounter few differences to how you file your taxes, aside from possibly having more deductions.
In order to be recognized as an LLC, you will need to file paperwork and pay fees. What kind of paperwork and how much in fees will vary from state to state. But the basic paperwork required regardless of state indicates the name of your business, its location, and who the members are.
Depending on where you form your LLC, you may also have to pay an LLC tax or, in some states, what’s called a franchise tax. I know — we’re not talking about franchises, we’re talking about LLCs. You weren’t really expecting tax law to make sense, were you? C’mon.
Forming a Foreign LLC
You’ll notice I said “depending on where you file your LLC.” Sure, this is because it depends on the state you live in, but something you may not know is you can file an LLC in any state you like, whether you live there or not.
Why would anyone do this? For lots of reasons, but the two main ones are:
- to make the filing process easier, and
- to reduce expenses
While forming a business can be a complex process in some states, when we did it, we filled out a form, sent it to the state capital, paid a few hundred dollars, and in exactly one week, we were an LLC. Just like that. Done. It couldn’t possibly have been any easier than it was.
As for expense, if you live in California, you’ll pay a fairly high LLC tax of 8.84%, and a minimum tax of $800, and income tax to boot. If you file your LLC in Texas, you’ll pay a franchise tax of just 1%.
(While I may be just a teensy bit biased toward Texas (Go Spurs Go!), it’s not the only state that offers benefit to those forming an LLC. But seriously — barbecue. That’s all I’m saying.)
Forming an LLC in another state — a “foreign LLC” — may also require the payment of additional up-front fees. You’ll need to do your own homework here to decide not only whether you want to make the leap from sole proprietor to LLC, but then whether to file in your home state or not.
Speaking of doing homework, I’m discussing these topics based on my personal experience, and from a general, educational point of view. But remember that we’re talking about legal entities here that have certain tax responsibilities. As I’m neither a lawyer nor a tax accountant, be sure to consult one or the other or both, or at a minimum, do your own research before making any changes to your business status.
Now, how can switching from a sole proprietorship to an LLC benefit you as a business owner?
Let’s be honest for a minute here. As prevalent and in demand as the freelance writer is, there’s still a pervasive attitude that if you’re a freelancer, you’re not a “real” business. You just have some free time on your hands, and you figured you’d make a few bucks while your kids were at school, or on the weekends. You’re not really expecting to make a living doing that, are you? So businesses can sometimes be reluctant to pay reasonable and fair rates for freelance work.
I’ve definitely been there. In fact, when I was freelancing, I took to referring to myself as an “independent professional writer” in an effort to be taken more seriously — and to have my rates taken more seriously.
That changes when you become a registered business entity. When you put an LLC (or an Inc., or whatever official designation you establish) after your business name on your website, people perceive you differently. I’m not going to lie to you and say companies immediately open their wallets wider to pay for web content because we still have a struggle with content mills, but that’s another post.
But when you can put a business name and logo on your invoices, you can begin to change how your clients interact with you and how potential clients see you.
It may also open up other opportunities to you such as speaking engagements, offers to guest post on well-regarded blogs and even press quotes (Are you signed up with HARO?).
Those marketing opportunities are all fantastic, but the main goal of those activities is to get clients. You also know that some clients respond to perceived scarcity (a classic marketing tactic), and to perceived value (a necessary facet of your business). How better to bolster both of those perceptions than to move from being an individual freelance writer to an LLC?
Just as your industry colleagues may view you differently once you change your status, so too will potential clients. In fact, establishing your business as an LLC (or other entity) may even passively assist you with client pre-qualification. Some potential clients may infer that once you become a small business, you’re probably more expensive than a freelancer. Whether this is true or not, it may keep the more, uh, frugal clients out of your inbox, leaving plenty of room for those who are really serious about their content, and serious about hiring you at your possibly higher rates.
Well, this one just naturally follows the last one if forming an LLC brings you more regard and more clients. But if you do go this route, why not raise your rates a bit? In fact, you really should.
Even if you form a single-member LLC, you’re likely going to have a few more expenses than you had as a sole proprietor. You still may not have to worry about renting office space, but you may want to step up from using your Gmail address to a domain-based address that you access via Gmail. The best option for that is Google Apps, which, while very affordable, does cost.
Then there are business cards. Again, you can find affordable options, but now that you’re a business and not a freelancer, you need cards with your logo on them that make more of an impression than most free cards you may find.
And don’t forget your LLC or franchise taxes and other fees. As a business, you have other expenses you didn’t have before. Raising your rates may not bring an immediate raise in net profit. But if your new rates cover your new expenses while keeping your income status quo (at least at first), you’re coming out ahead.
You may also find it easier later on when it comes time to raise your rates again. Some clients won’t take it well, but that’s just another way of qualifying clients. Again, a post for another time.
OK, now let’s think for a moment. If you’re going to form an LLC, you’re positioning yourself for more credibility, more clients and more revenue. Well, how are you going to handle all those new clients and new marketing opportunities by yourself? Maybe you don’t have to fly solo.
I never thought I’d go into business with a partner. My experiences as an employee with less-than-stellar bosses put me in a mindset of wanting to go it completely alone. Well, things happen, things change, and I did not only get a business partner, I became one. But it’s led our business to bigger and better things.
Think about it — two times the labor force. Two times the marketing. Where I’m weak, she’s strong, and vice-versa. And now that she’s moved back to her home state of Ohio while I’m still in Texas, we’re a national company with two locations! OK, we both still work from home, but you get what I mean. She’s making all new connections up there while I’m still working in our community here.
But the best thing? Those days when being an entrepreneur is hard, when clients are making us crazy, when we wonder what the heck we were thinking — those days, it’s wonderful to be partners who keep each other grounded, who listen to each other vent and then give each other that push we need to keep going.
The point is, starting a business is hard. Keeping it going is even harder. Doing everything all by yourself, well, that’s not always all it’s cracked up to be. If you’re thinking about making your business official, you can open yourself up to a lot of benefits. But don’t let the fact that, up to this point, you’ve worked alone, be the thing that stops you.
In fact, don’t let anything stop you.
About the Author
Michelle Lowery is a freelance book editor, provides website optimization for authors and wrote the book Self-Editing for Indie Authors. Learn more about her by visiting her site at michellelowery.com.