A Guide to Establishing an LLC for Freelancers and Consultants

By Rachel Lane
Posted May 7, 2018

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If you are considering establishing a limited liability corporation (LLC), this article will simplify that process. Recently, I transitioned from a full-time employment position to freelance writing/consulting. I never thought I would be a business owner, so when I knew the transition was imminent, I began scouring online resources, searching for a cohesive article that explained the sequential steps for establishing an LLC. My search was unsuccessful. Many online companies offered to complete the filing for a fee, but I felt a responsibility to directly experience and understand the process. This article summarizes what I learned during that process and provides a list of steps to form a single-member LLC.

1. Decide between forming a sole proprietorship or single-member LLC
To make this decision, two main issues must be considered: responsibility and convenience.

Responsibility - How risky is your work? In a sole proprietorship, your (and your spouse's) personal belongings (house, car, etc.) are at risk in work-related lawsuits, but in an LLC, your personal belongings are protected. This protection provides a peace of mind for you and your family, even if you do not foresee any legal issues associated with your work. Business advisors also informed me that businesses prefer to write checks to companies rather than individuals, which is another benefit of creating an LLC.

A special note for medical writers: I have been advised that pharmaceutical companies prefer to contract with LLCs.

Convenience - Are you willing to operate a separate bank account? If you establish an LLC, you must open a business bank account. This banking setup is less convenient than a sole proprietorship, where freelance income can be deposited into your personal banking account. In an LLC, client payments must be deposited into the business account first and then transferred to your personal account. A business account adds a couple extra steps between you and pay day.

For federal taxes, if you are the only member of the LLC (i.e., no partners), filing taxes for the LLC will be the same as for a sole proprietorship. A single-member LLC is considered a "disregarded entity," which is a good thing! Your LLC will be treated as a sole proprietorship for federal tax purposes. Instead of filing separate taxes for your LLC, you can fill out and attach a schedule C form to your personal taxes.

2. Schedule an appointment with your local small business development center (SBDC)
If you decide an LLC is right for your business, schedule a business counseling appointment at your local SBDC. The SBDC offers complimentary business consulting, led by trained volunteer counselors, to new businesses. When I met with an SBDC counselor, I received information on how to establish an LLC at the state and federal level, and the counselor answered general questions regarding state taxes and recommended local networking opportunities specific to my business.

Note: The SBDC is not a tax authority. For tax questions, contact a CPA.

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3. Decide on a business name and reserve it
Choosing a business name is very personal, and consulting with a marketing team may be worthwhile. I did not consult with a marketing team. Instead, I chose a business name, The Written Science, that clearly indicates the service I offer: science writing. With a straightforward name, my purpose is clear, and I am less likely to be overlooked by potential clients.

One thing I did not consider was name length. My business name is composed of three words, but a name with two words or less may be easier for clients to remember and potentially shortens social media handles. For cohesive branding, consider a name that can be used consistently across all media and marketing platforms. The resources listed here may be useful in this decision process.

Once you identify a potential name, peruse social media and Google to ensure the business name is unique and does not already have a web presence. As soon as I had a company name I liked, I reserved the ".com" domain, the Instagram and Twitter handles, and the entity name with my state. The official name registered with the state must include "LLC."

To reserve your business name with the state, a quick Google search (e.g., "reserve entity name in <your state>") should locate the appropriate secretary of state webpage. For example, here is Alabama's webpage for entity name reservation. Reserving the name requires a small annual fee (approximately $30 in Alabama). The reservation will need to be renewed every year until the LLC is officially established with the secretary of state: if you decide on the perfect name for your business three years before you file as an LLC, you will need to renew the reservation each year.

Note: Should a comma be placed between your business name and "LLC"? When applying for an employee identification number (EIN), you will NOT be allowed to use a comma. For consistency, I would NOT use a comma in your state filing (i.e., use "My Company LLC" not "My Company, LLC").

4. Register your company as an LLC with the secretary of state 
To start doing business, you need register your company as an LLC with the secretary of state. If you are filing in the state you reside in, you can do this step yourself. Some counties allow this process to be completed online. My county allowed me to prefile the paperwork online. To complete the filing, I took a printed copy of the paperwork to the courthouse. At the courthouse, the clerk scanned the barcode on my papers, I paid the filing fees (about $200), and then, my company was official. I spent less than 10 minutes at the courthouse. Approximately 2 weeks later, I received my state tax information in the mail.

Check your state tax laws and pay attention to all notification/handouts you receive. In Alabama, the LLC owner is required to pay the minimum company tax within the first 2.5 months of formation (e.g., if you formed the LLC during the first of June, the tax would be due mid-August). Most sources recommend filing quarterly taxes, and this may be required in your state.

Note: If you want to establish the LLC in a state where you do not reside, you will need to hire a local agent to file for you.

5. Obtain an employer identification number (EIN)
After filing with the state, you may need to obtain an EIN. Although single-member LLCs do not need an EIN to file federal taxes, an EIN is usually required to open a business checking account and will be necessary if employees are hired. The EIN is obtained by filling out an online application. The application will ask how many members are included in the LLC. If the LLC has only one member (you), the LLC will be filed as a single-member LLC and thus is considered a "disregarded entity." The application will clearly notify you of this status, and if you wish to be taxed as a corporation, you can fill out an additional form. This status qualifies you to file taxes as a sole proprietor: instead of filing a separate federal tax form for your LLC, you can attach a schedule C form to your 1040, using your social security number or taxpayer identification number instead of your EIN.

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6. Choose a bank
Choosing a bank can be overwhelming. A few points to consider are listed below.

Are you willing to pay for business checking? Complimentary business accounts do exist. Consider the questions below to determine which features are most important to you and your business. If you are unwilling to pay for a business account, some features may not be available. 

How many transactions do you anticipate? The number of allowed transactions seems to be a major discriminating factor among different tiers of business checking accounts. Transactions include deposits and withdrawals. For an LLC, you are likely to have multiple deposits from different clients each month and at least one withdrawal to pay yourself, maybe more for work-related purchases. Estimate the number of transactions you anticipate per month and ensure that the bank you choose can accommodate that transaction volume. Exceeding the transaction limit can incur fees.

What is the minimum balance? How much money are you willing to tie up in the business account? As a freelancer with minimal overhead and a simple business model, I did not want $500 tied-up in maintaining a minimum account balance.

Is mobile banking offered? Mobile banking is another key discriminator among business checking accounts. The ability to quickly deposit client checks and transfer funds from my business account to my personal account was important to me. My goal is to maintain maximum flexibility during working hours so that I can accommodate client schedules: I do not want to squeeze a bank trip between client meetings.

Is a debit card provided? A debit card is essential for online work-related purchases and makes in-store purchases simpler.

Does the bank have a local presence? A bank with a local brick-and-mortar presence gives you the opportunity to personally meet with an individual about your account questions or concerns. Local banks can also offer insight into the local community and provide connections for community involvement - an added benefit that I did not expect but found very desirable.

The above information summarizes what I learned while establishing my LLC. Since initially writing this article, I found this resource, which provides detailed, state-specific information. I am not a tax or business expert. While I believe this information is useful and correct, I am not inerrant, and regulations likely vary among states. Please consult with a tax or business expert when setting up your LLC.