Disclaimer: I know I mentioned this earlier, but it definitely applies to this section more than any other: I’m not an expert on this subject. The legal part of doing freelance can vary by location so I’d make sure to ask around in your area regarding how people legally manage themselves. That being said, here is what I have done:
Creating an LLC
An LLC (limited liability company), is one of a few different business types anyone can create. The primary purpose of an LLC is to provide a “Legal Shield” of sorts. Here is an example of how an LLC can benefit you in a legal-sense: Let’s pretend that one of my clients decided to sue me for something related to a website I made for them. If they won the lawsuit and I don’t have an LLC, they could potentially take money/assets from my personal bank account. If the case was really bad they could theoretically take everything I own and leave me bankrupt. Now, pretending that I have an LLC and did the work for them as “Hesterman Holdings, LLC”, they could bankrupt my company but all my personal money and assets would be safe (assuming I kept good record of all my costs/transactions, more on that in the “Managing your business” section)
Actually creating an LLC is pretty simple, but not exactly straight forward. There is a fee for creating one (mine was around $75), a declaration of ownership (see below), and a pretty long registration form you need to fill out.
- Registration This part varies from state to state. In Utah, I just googled ‘Register LLC in Utah’ and eventually made my way to this page. You’ll be asked things like whether you sell livestock, if you sell disposable cell phones, or if your business involves anything risque or explicit.
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Declaration of ownership
Often times, you will be asked to provide a declaration of ownership. This document can be pretty simple, here is an example of mine:
*Note that I own a majority (by 1%). We didn’t choose to organize it this way so that I could make really obnoxious jokes to my wife about how she works for me (don’t do this, I’m yet to get a laugh). This is simply so we don’t both need to be present for decisions involving the business, such as opening a bank account or line of credit.
Once you submit the documents, you will wait a short period and then get your business license and an EIN. The EIN is essentially a social security number for your business, as such make sure you keep it confidential. You use it as a unique identifier when you apply for a business bank account, filing taxes, and other things.
Where to store the money
I originally opened a business bank account with Wells Fargo to house a lot of my funds from a particularly large job that I had completed until I could figure out what I wanted to invest them in. I used it for a while, but they fined you if you didn’t leave at least $10,000 in your checking account. That felt like a lot of money to have just sitting in the bank so I closed the account and have since combined my LLC funds into my personal bank account. There is a level of risk associated with this that can be minimized through keeping clear and accurate records of your LLC’s income/expenses. I use google sheets to track this.Tax Deductions
One of the largest benefits of LLCs is writing off business expenses. You can find out the specifics on this subject easily online, but I’ll provide a brief overview of the benefits of these. In short, there are a large amount of “expenses” that you can count as LLC expenses if you use them for your work. If you track these and then properly include them in your taxes, it will lessen the amount of taxable income you ultimately have to pay for. If you use certain things for both personal use and business use, you can estimate a percentage of how much of said item you use and then deduct that amount (I use my PC 25% of the time for business use, for example). For detailed info, I recommend looking here. Here are some examples of expenses that I write off (or partially write off if they are used for personal use as well):Cell Phone and Cell Phone Bills
Computers or computer parts/peripherals
Office equipment/supplies
Portions of your rent/utilities (look this up online for more details, there are some specific rules around this one)
Subscriptions to software that relate to your business (Adobe Creative Cloud, Github Premium, Cloud Storage)
These are just some of the things I write off regularly, they actually have had a pretty big impact on the amount of taxes I’ve ended up having to pay. Come tax season, you will want a clear record of these so you can account for everything correctly. I used to do my own taxes until I started my LLC, now I pay an accountant about $400 a year to take care of them for me since I’d rather just have the peace of mind knowing they were done by a professional.
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