If you're a freelancer, you've most likely heard about the advantages an LLC can offer you over other business structures: protection of your personal assets, credibility, tax benefits, internationalization, etc...
If you're curious about the benefits of forming an LLC for your freelance business, how to open one and what other alternatives exist, keep reading!
What is an LLC?
A limited liability company, or LLC, is a formal business structure registered at the state level in which the company is legally separate from its owner or owners.
LLCs can have a single owner (single-member LLC), which suits freelancers, or they can have several members.
An LLC is easy to open for both U.S. residents and foreigners, it's inexpensive, the process is fast, it's easy to keep in compliance, and in addition to protecting its members from liability, it offers several tax advantages for those who sell their services remotely.
The advantages of opening an LLC for freelancers
If U.S. LLCs are growing enormously in popularity among freelancers around the world, it's because of the major advantages LLCs offer.
Limited liability
Thanks to the limited liability LLCs offer, your personal assets are separated from the business's assets by a corporate veil.
If you ran into legal or financial problems because of your freelance work, your personal liability would not be exposed, protecting your personal assets, such as the money in your personal bank accounts, your car, your house…
Access to a U.S. bank account
With an LLC, you can open a business account in dollars at any bank in the United States. This lets you receive, send or save dollars without any problem.
Easy to form and maintain
Opening an LLC in the United States is easy to do. It can be done 100% online, or you can hire services that take care of everything for you.
In addition, LLCs are very easy to maintain. There is very little red tape, and the annual obligations are few and easy to meet. Keeping your LLC in compliance shouldn't take you more than a few hours a year, letting you focus on your freelance work without any hassle. The obligations will vary depending on the state you choose to register your LLC in.
Major tax advantages
U.S. LLCs are pass-through entities, meaning the company does not pay income tax. That liability passes through to the personal tax return of each of the LLC's owners.
If your LLC is considered foreign-owned (it has no American members), and it is not considered ETBUS, you will most likely pay 0% tax on the sale of your remote freelance services or digital products.
Anonymity
There are some U.S. states where LLCs are anonymous. This means that the members' names are not shared publicly, which helps protect their privacy.
Credibility
Opening an LLC in the USA as a freelancer will give your business credibility and trust. Having an LLC to invoice your clients conveys a professional image, makes it very easy for them to hire and pay you, and gives you an international presence.
How do you open an LLC as a freelancer?
- Choose the state in which to register your LLC: There are 50 states in which you can register an LLC, and each one has its advantages and drawbacks. Here we help you choose.
- Choose the LLC's name: The name of the LLC for your freelance work must meet certain requirements.
- Hire a registered agent: The registered agent will be responsible for providing official documents to the members. Having a registered agent is mandatory. Many companies offer registered agent services, and they cost between $100 and $300.
- File the Articles of Organization: The Articles of Organization are the document that forms your LLC with the Secretary of State of the chosen state. It can be done online, and there is a filing fee that varies by state. Below we'll cover the costs of opening an LLC.
- Create the LLC's operating agreement, which describes how the entity will be managed. It is not mandatory for single-member LLCs.
- Apply for an EIN: The EIN is needed to open a business bank account, which keeps personal assets separate from the company's.
- Meet the annual obligations: There are a few annual obligations to meet, which depend on the chosen state (annual reports, taxes, IRS filings). Failing to meet them can lead to penalties or the dissolution of the LLC.
How much does it cost to open an LLC as a freelancer?
The costs of opening an LLC vary depending on the state you choose to register it in. The costs are usually as follows:
- A filing fee that ranges from $40 to $800, averaging $123.
- An annual report, which ranges from $0 to $800, averaging $89.
Then there is the cost of renewing a registered agent, which usually ranges from $100 to $300 if you choose to hire a service.
Which state should I open an LLC in as a freelancer?
You can open an LLC in any of the 50 U.S. states, and each state has its advantages and drawbacks.
- If you're a U.S. resident, or if your business will have a physical presence in the United States (although that shouldn't be the case for most freelancers), it's advisable to register the LLC in that state.
- If you're a non-resident foreigner, these are the most popular options for opening an LLC for your freelance work (New Mexico being the most popular among freelancers because of its low formation costs, anonymity and no annual report):
| Florida | Delaware | Texas | New Mexico | Wyoming | |
|---|---|---|---|---|---|
| Formation cost | $125 | $90 | $300 | $50 | $100 |
| Annual report cost | $138.75 | $300 | 0 | 0 | $60 |
| Processing time | 5 business days | 9 to 12 weeks | 7 business days | 3 business days | Same day |
| Anonymity | No | Yes | No | Yes | Yes |
Sole proprietorship: the alternative to an LLC for freelancers
Many freelancers, both in the USA and abroad, opt for a legal structure called a "sole proprietorship". The great advantage of this legal structure is that setting it up and maintaining it is much simpler and less expensive than an LLC. However, sole proprietorships do not offer limited liability, so you don't get the personal asset protection an LLC provides.
| Sole proprietorship | Single-member LLC | |
|---|---|---|
| Paperwork | Requires minimal initial paperwork. | The paperwork is somewhat more significant. |
| Cost | No formation or maintenance costs. | The cost varies by state. There are usually annual obligations and costs. |
| Limited liability | There is no limited liability. You are personally liable for all of the business's debts and obligations. | Business and personal assets are separate. There is limited liability |
| Number of members | Cannot add members in the future. | LLCs can add members in the future. |
| Taxes | Pass-through entity. All sole proprietors are self-employed. | Taxed as a sole proprietorship by default, but can also elect to be taxed as a C-Corp or S-Corp. |
Conclusion
U.S. LLCs are a great option for foreign freelancers. Personally, I chose to open my non-resident LLC in New Mexico for my freelance income, since I only pay a $50 filing fee, there is no annual report, my only obligation is an annual filing with the IRS and I pay 0% tax as a company.
Although sole proprietorships are a simpler and cheaper option, the fact that they don't protect personal assets means that many freelancers prefer LLCs, since the costs are still perfectly reasonable.
Finally, if you've decided to open an LLC for your freelance work, I truly recommend hiring one of these LLC formation services: they will take care of everything for you, notify you about your annual obligations and answer any questions you may have.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, founder of Start Companies and a specialist in U.S. companies for entrepreneurs, freelancers and digital businesses in Latin America. With training in international taxation and studies at UCEMA, he advises non-resident clients on forming and maintaining LLCs, opening bank accounts, invoicing, accounting and taxes. His experience combines tax strategy, compliance and practical vision for operating in the U.S. in a simple, organized and professional way.
