Taxes and business
LLC (Limited Liability Company)
An LLC, or Limited Liability Company, is a registered business structure that separates your personal assets from business liabilities and is taxed as pass-through by default.
What an LLC is
A Limited Liability Company is a business structure you register with your state. Unlike a sole proprietorship, an LLC is a legal entity that is separate from its owners, who are called members.
The headline benefit is the limited liability in the name. Because the business is its own entity, the owner personal assets such as a home or savings are generally protected if the business is sued or cannot pay its debts, as long as the LLC is run properly.
How an LLC is taxed
By default, an LLC is a pass-through entity, meaning the business itself does not pay income tax. Profits and losses pass through to the owner personal return. A single-member LLC is typically taxed much like a sole proprietorship, using Schedule C.
LLCs are flexible, and in some cases owners elect to have the LLC taxed as an S corporation to change how self-employment tax applies. Whether that helps depends on income and other factors.
When a freelancer might form one
A freelancer might form an LLC once the risk or income of the work grows enough to justify it. Common reasons include wanting to protect personal assets from business lawsuits, working in a field with higher liability, signing larger contracts, or simply wanting a more formal, professional structure.
Forming an LLC involves filing with the state, paying a fee, and often an annual fee or report, so it adds cost and paperwork compared with a sole proprietorship. This is general information, not tax or legal advice, so consult a qualified professional before forming one.
Example: A general contractor forms an LLC for their business. A year later a client sues over a disputed job. Because the work was done through the LLC and the business was run properly, the lawsuit targets the business assets, and the contractor personal savings and home are generally shielded.
FAQs
Frequently asked questions
Does an LLC change how I pay taxes?
By default a single-member LLC is taxed much like a sole proprietorship, with profits flowing to your personal return. The main change is liability protection, not automatic tax savings, though owners can sometimes elect S corporation treatment.
Do I need an LLC to freelance?
No. Many freelancers operate fine as sole proprietors. An LLC is optional and is usually considered when liability risk or income grows.
Does an LLC need an EIN?
Multi-member LLCs need an EIN, and single-member LLCs often get one too. It is free from the IRS and keeps your SSN off W-9s and invoices.
Can I invoice under my LLC name?
Yes. Once registered, you invoice and contract under the LLC name, which helps reinforce the separation between you and the business.
Related terms
Sole Proprietor
A sole proprietor is the default, unregistered business structure for a single person, where you and the business are the same legal entity for taxes and liability.
EIN (Employer Identification Number)
An EIN, or Employer Identification Number, is a free federal tax ID number from the IRS that identifies a business, letting you keep your Social Security number off invoices and W-9s.
Invoice
An invoice is a document a seller sends to a buyer that itemizes goods or services provided and requests payment by a stated due date.
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