LLC Vs Sole Proprietor: Which Is Best For YOUR Freelance Writing Business?

Aug 19, 2023 | Start Freelance Writing

In this article, we’ll be discussing the pros and cons of forming an LLC or operating as a sole proprietor for your freelance writing business. As someone who’s been in the freelance game for a while now, I’ve faced the LLC vs. Sole Proprietor dilemma myself.

I started as a sole proprietor because it was the easiest and quickest way to get my freelance writing business off the ground. But over 7 years later, and now that I’m making six figures, I’m seriously considering switching to an LLC. Hopefully this blog can help you make the right decision too.

By the end, you will have a clear understanding of which option may be best suited for you. Whether you’re just starting out or looking to make a switch, let’s explore the differences between these two options and discover which one aligns with your goals and needs.

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Table of Contents

Overview of LLCs and Sole Proprietorships

Definition of a Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure that combines the flexibility and simplicity of a sole proprietorship with the limited liability protection of a corporation. In an LLC, the business is treated as a separate legal entity, which means that the owner’s personal assets are protected in case of any business liabilities or debts. This structure provides a great balance between personal liability protection and operational flexibility.

Definition of a Sole Proprietorship

A sole proprietorship is the simplest and most common form of business structure. It refers to a business that is owned and operated by a single individual. Unlike an LLC, a sole proprietorship does not create a separate legal entity. The owner and the business are considered the same, which means that the owner is personally responsible for all the business’s liabilities and debts. Sole proprietorships are easy to set up and have minimal legal and administrative requirements.

Key Differences between LLCs and Sole Proprietorships

As someone who’s been a sole proprietor for years, I can tell you that the ease of setup is a real advantage, especially when you’re a busy mom like me. But now that I’m making six figures I can’t afford to put my family’s financial security at risk. That’s why the limited liability protection of an LLC is looking pretty darn appealing these days.

When considering which business structure is best for your freelance writing business, it’s important to understand the key differences between LLCs and sole proprietorships.

  1. Limited Liability Protection: One of the main advantages of an LLC is that it offers limited liability protection to its owners. This means that the owner’s personal assets, such as their home or car, are not at risk in case the business faces legal actions or financial debts. On the other hand, as a sole proprietor, you are personally liable for all business obligations, putting your personal assets at risk.
  2. Tax Flexibility: Both LLCs and sole proprietorships offer tax advantages, but they differ in their tax treatment. LLCs have the flexibility to choose their tax status, allowing them to be taxed as a partnership, a corporation, or even disregarded for tax purposes. Sole proprietors, on the other hand, report their business income and expenses on their personal tax return, which can simplify the process but may not offer as many tax planning options.
  3. Credibility and Professionalism: Forming an LLC can provide your freelance writing business with a sense of credibility and professionalism. Many clients, especially larger corporations and organizations, prefer to work with businesses that are structured as LLCs rather than sole proprietorships. This formal business structure can elevate your image and help you attract higher-quality clients.
  4. Complexity and Costs: Setting up an LLC requires more paperwork, legal formalities, and ongoing administrative obligations compared to a sole proprietorship. LLCs typically require the filing of Articles of Organization with the state, creating an Operating Agreement, maintaining proper records, and adhering to annual filing requirements. Sole proprietorships, on the other hand, have fewer formalities and lower initial costs associated with formation.
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Speaking of complexity and costs, let me give a shoutout to Harpoon, the invoicing software I swear by. Whether you’re an LLC or a sole proprietor, managing your finances can be a hassle. Harpoon automates everything from sending invoices to tracking cash flow to revenue forecasting. It even helps me with tracking my deductions for tax write-offs! So, even if you go the LLC route, you can still keep things simple with an automated tool like Harpoon.

Advantages and Disadvantages of LLCs

Limited Liability Protection

As mentioned earlier, an LLC provides limited liability protection to its owners. This means that your personal assets, such as your house or car, are generally protected in case your freelance writing business faces legal issues or debts. This protection can give you peace of mind and a sense of security, knowing that your personal finances are separate from your business liabilities.

Tax Flexibility

LLCs offer tax flexibility by allowing you to choose how the business is taxed. Depending on your specific circumstances and goals, you can elect to be taxed as a partnership, a corporation, or even as a disregarded entity. This flexibility allows you to optimize your tax situation and potentially save money on taxes.

Credibility and Professionalism

Forming an LLC can enhance your freelance writing business’s credibility and professionalism in the eyes of clients, colleagues, and potential partners. Many organizations prefer to work with businesses that have a formal legal structure rather than sole proprietors. By choosing an LLC, you can present yourself as a serious business entity, which can open doors to better opportunities and higher-paying clients.

Complexity and Costs

One of the drawbacks of forming an LLC is the increased complexity and costs associated with its creation and maintenance. There are various legal formalities and ongoing administrative obligations that need to be fulfilled, such as filing Articles of Organization, creating an Operating Agreement, and adhering to annual filing requirements. Additionally, there may be additional costs involved in setting up an LLC compared to a sole proprietorship.

Advantages and Disadvantages of Sole Proprietorships 

Simplicity and Ease of Formation

Sole proprietorships are the simplest and easiest business structure to set up. There are minimal legal formalities and administrative requirements involved. You can start your freelance writing business as a sole proprietor by simply starting to conduct business under your own name or by registering a trade name.

As a sole proprietor and a mom, I’ve loved the total control and decision-making freedom of a sole proprietorship.

Total Control and Decision-Making

As a sole proprietor, you have complete control over your freelance writing business and all decision-making processes. You don’t need to consult with partners or shareholders before making any business decisions. This level of autonomy gives you the freedom to run your business the way you see fit, without any interference.

Unlimited Personal Liability

The main disadvantage of a sole proprietorship is the lack of limited liability protection. As the sole owner of the business, you are personally responsible for all business debts and liabilities. If your freelance writing business faces legal actions or financial problems, your personal assets could be at risk.

Lack of Credibility

Sole proprietorships may be viewed as less credible and professional than businesses with a formal legal structure, such as an LLC. Some clients, especially larger corporations and organizations, may be hesitant to work with sole proprietors due to concerns about the business’s stability and longevity.

Factors to Consider in Choosing between LLCs and Sole Proprietorships

When deciding between an LLC and a sole proprietorship for your freelance writing business, there are several important factors to consider:

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Legal Liability

If you are concerned about personal liability and want to protect your personal assets, forming an LLC is the better option. LLCs offer limited liability protection, ensuring that your personal assets are separate from your business liabilities.

Tax Obligations

Consider your tax obligations and preferences. LLCs offer more flexibility in terms of tax planning and can potentially provide tax advantages. However, if you prefer simplicity and ease of reporting, being a sole proprietor may be more suitable.

Business Growth and Expansion

Think about your long-term business goals. If you plan on expanding your freelance writing business in the future, maybe into a full-blown marketing agency, an LLC may provide a more scalable and formal structure. It can make it easier to bring in partners, raise capital, and attract investors.

This may seem like broad, big goals… You might be thinking you never want to go that route… But with all the advancements in AI writing tools, us freelance writers need to keep our options open. Our future ability to make money solely as writers could change dramatically in the coming years, so it’s important to consider other ways that you can leverage your marketing skills and grow your business.

Financial Considerations

Consider the costs associated with setting up and maintaining an LLC versus a sole proprietorship. LLCs may have higher initial costs and ongoing administrative expenses. Evaluate your budget and determine what you can afford.

As someone who’s been through the ups and downs of freelance income, I can’t stress enough the importance of good financial tracking. That’s another reason I love Harpoon — it helps me set financial goals, offers real-time revenue forecasts, and even automates overdue reminders. It’s like having a financial advisor in my pocket! Seriously, it’s that good.

Long-Term Goals

Lastly, consider your long-term goals for your freelance writing business. If you envision it growing into a larger and more complex operation, an LLC may be the better choice. On the other hand, if you plan on keeping your business small and manageable, a sole proprietorship may suffice.

Steps to Form an LLC

If you decide that forming an LLC is the best option for your freelance writing business, here are the steps you need to follow:

Choose a Business Name

Select a unique and memorable name for your LLC. Make sure to check if the name is available and complies with your state’s naming requirements.

File Articles of Organization

Prepare and file the Articles of Organization with your state’s Secretary of State office. This document officially establishes your LLC and includes important information about your business.

Create an Operating Agreement

Draft an Operating Agreement, which outlines the ownership and operating procedures of your LLC. Although not always required by law, an Operating Agreement is highly recommended as it helps clarify ownership details and avoids future disputes.

Obtain Required Licenses and Permits

Depending on your location and the nature of your freelance writing business, you may need to obtain certain licenses and permits. Check with your local government agency to identify the necessary requirements.

Secure an Employer Identification Number (EIN)

Apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This unique identification number is used for tax purposes and is often required for opening business bank accounts, hiring employees, and filing taxes.

Steps to Start a Sole Proprietorship

If you decide that a sole proprietorship is more suitable for your freelance writing business, here are the steps you need to follow:

Choose a Business Name

Just like with an LLC, choose a unique and memorable name for your sole proprietorship. You can use your own name or register a trade name if you want to operate under a different business name.

Register the Business Name

If you decide to use a trade name, register it with the appropriate local government agency. This step ensures that no one else can use the same name for their business.

Obtain Required Licenses and Permits

Determine the licenses and permits you need to operate legally and compliantly. Research the requirements specific to your location and industry and apply for the necessary documentation.

Secure an Employer Identification Number (EIN)

While not mandatory for sole proprietors, you may still choose to obtain an EIN. It can be beneficial for separating your personal and business finances, as well as for certain tax reporting purposes.

Set Up a Separate Business Bank Account

To keep your personal and business finances separate, open a separate bank account for your sole proprietorship. This will help you track income and expenses accurately and simplify tax reporting.

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So, you’ve got the steps for both LLC and sole proprietorship. But what’s my personal take? Well, as my freelance writing business grew, so did my needs. I started to look for ways to automate tasks and make tax time WAY easier. And now as I consider moving to an LLC, I know Harpoon will scale with me. It’s a tool that fits well, no matter your business structure.

Tax Considerations

Tax Filing as an LLC

LLCs offer various tax options, depending on the number of owners and how you choose to be taxed. Single-member LLCs are treated as disregarded entities for tax purposes, meaning the income and expenses are reported on the owner’s personal tax return. Multi-member LLCs can be taxed as partnerships or corporations.

And I know, I know… I keep bringing up Harpoon. But it has truly been a lifesaver during tax season. It pulls reports that help me with write-offs and keeps track of my financial goals. Whether you’re an LLC or a sole proprietor, trust me, you’ll want Harpoon in your corner.

Pass-Through Taxation

Both LLCs and sole proprietorships enjoy pass-through taxation. This means that the business’s profits or losses are “passed through” to the owners’ personal tax returns and are taxed at the individual level. This avoids double taxation that corporations may be subject to.

Self-Employment Taxes

As an owner of an LLC or a sole proprietorship, you are considered self-employed, and you are responsible for paying self-employment taxes. These taxes include Social Security and Medicare taxes, which are typically at a higher rate than regular employee payroll taxes.

Tax Deductions and Credits

Both LLCs and sole proprietorships can take advantage of various tax deductions and credits available to self-employed individuals. These deductions can include business-related expenses such as office supplies, marketing costs, travel expenses, and health insurance premiums.

Estimated Tax Payments

Unlike traditional employees who have taxes withheld from their paychecks, LLC owners and sole proprietors are responsible for making estimated quarterly tax payments. These payments are based on your estimated tax liability for the year and are due on a set schedule.

Legal Obligations and Compliance

Reporting Requirements

LLCs and sole proprietorships have different reporting requirements. LLCs are typically required to file annual reports with the state, comply with ongoing record-keeping obligations, and maintain proper financial records. Sole proprietors, while having fewer formalities, should still keep accurate records for tax purposes.

Business Contracts and Agreements

Both LLCs and sole proprietors should use written contracts and agreements when conducting business. Contracts help establish clear expectations, protect the rights of both parties, and minimize the risk of disputes or misunderstandings.

Employment Laws and Regulations

If you plan on hiring employees for your freelance writing business, it’s essential to familiarize yourself with and comply with applicable employment laws and regulations. This includes areas such as employee classification, payroll taxes, minimum wage requirements, and workplace safety standards.

Intellectual Property Protection

As a freelance writer, protecting your intellectual property is crucial. Consider registering your copyrights and trademarks to safeguard your work and prevent others from using your content without permission.

Insurance Coverage

While you’re generally not at risk of any kind of physical injury as a freelance writer, a legal professional will probably recommend that both LLCs and sole proprietors consider obtaining appropriate insurance coverage for their businesses. General liability insurance can protect against claims alleging property damage or bodily injury, while professional liability insurance can provide coverage for errors or omissions in your work. So is insurance really necessary for freelancers? Here are some reasons you might want to consider it.

Choosing the Right Business Structure for Your Freelance Writing Business

Assessing Your Business Needs and Goals

Take the time to evaluate your specific business needs and goals. Consider factors such as personal liability protection, tax obligations, growth potential, and cost considerations.

Weighing the Pros and Cons

Carefully consider the advantages and disadvantages of both LLCs and sole proprietorships. Reflect on the potential benefits of limited liability protection, tax flexibility, and credibility, as well as the drawbacks of complexity and costs.

Seeking Professional Advice

If you are uncertain about which business structure is most suitable for your freelance writing business, it is always a good idea to consult with a legal or tax professional. They can provide personalized advice based on your circumstances and guide you through the decision-making process.

Evaluating Personal Risk Tolerance

Consider your comfort level with assuming personal liability. If the thought of putting your personal assets at risk is a concern, forming an LLC may provide the peace of mind you need.

Considering Future Business Plans

Reflect on your long-term plans for your freelance writing business. If you want to expand, bring in partners, or seek outside investment, an LLC may provide a more scalable and attractive structure.

My Final Thoughts

Choosing between an LLC and a sole proprietorship is a big decision, and it’s one I’m currently grappling with myself. But no matter what you choose, having the right tools can make all the difference through your growth and transition. For me, Harpoon has been that tool. It’s helped me manage my freelance finances effortlessly into the six-figure world, giving me more time to focus on what I love — writing and, of course, spending time with my family.

When it comes to choosing between an LLC and a sole proprietorship for your freelance writing business, there is no one-size-fits-all answer. The ideal business structure depends on your individual circumstances, goals, and preferences. So carefully consider the legal, financial, and operational aspects before making a decision. By choosing wisely and prioritizing the protection of your business and personal interests, you can set the foundation for a successful freelance writing venture. Happy writing!

Desiree

Hi, I'm Desiree! The writer behind this site. I'm a stay-at-home mom and freelance writer who's been making a living with words for nearly a decade. I'm here to help you achieve your writing dreams while making a great income so you never have to miss out on life's precious moments!

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