SHOULD FREELANCERS REGISTER AS AN OFFICIAL BUSINESS ENTITY?

THE TOP ADVANTAGES OF USING AN EIN AND REGISTERING AS A DBA, LLC OR CORPORATION

Have you ever thought about taking the next step in your freelancing business and acquiring your own Employee Identification Number (EIN)? Perhaps you’re wondering if it’s worth it to register a Doing Business As (DBA) or as a Limited Liability Company (LLC) or corporation? When you’re a freelancer, there’s plenty to take care of to ensure your business runs smoothly: health insurance, your portfolio, business development, time tracking, invoicing, retirement savings and taxes to name a few. Registering can be an investment to set up, but can also truly benefit your freelancing business in the long run. Take a look at what benefits could come your way by making your freelancing services an official business entity…

 

EIN Advantages

  1. Establish yourself as an independent businessperson: By utilizing an EIN, you’re letting your clients know that you take your freelancing business seriously. This small detail can make freelancers more attractive to prospective clients. While not all companies require freelancers to provide an EIN, it certainly helps to have one and takes minimal time to obtain.
  2. Identity protection: As a freelancer, it’s a necessity for invoices, contracts and other confidential documents to be passed through client’s offices over the span of your career. Rather than having to worry about your Social Security number being misplaced via these documents or put into the wrong hands, an EIN can provide you ease of mind and protection. While an EIN is unique to you, it does not tie to your Social Security number and can’t be used for identity theft.

How To Obtain An EIN

You have multiple ways to obtain an EIN. The fastest way to complete an application is online through IRS.gov. As information is added to your application, it’s immediately validated. Upon completion, you will receive an EIN confirmation that will be ready to download, save or print for your records. You can also apply via fax or mail after completing the Form SS-4, also available online through IRS.gov. A fax with your EIN will be sent back within 4 days after approval. Applications sent through mail can expect a 4 week processing timeframe.

 

DBA Advantages

  1. Helps build brand awareness: By creating a DBA, you’re typically able to build stronger brand awareness for your business. While a business that includes an owner’s name, such as John Doe’s Graphic Designs, can still be successful, it’s often said that catchy or creative business names tend to assist in creating more buzz. Prospective clients can familiarize themselves with names they’ve heard through word of mouth or have been referred to by others within their industry. This name recognition can best be established with a solidified DBA. Having a DBA is also helpful if you’d prefer to simply not associate your name with your business’ name.
  2. Allows you to open a business bank account: If you want to run your business under any name but your own or in some cases even with a variation of your name, you’ll need a DBA to open a business bank account. Even in instances when a freelancer wants to keep their business under a part of their name and their service (ex: John’s Graphic Designs), a DBA may still be necessary. In order to bill clients directly from your business and not simply yourself, a DBA is the quickest, hassle-free way to go. By simply having this name linked to your work, you’re able to create invoices from your business and hold your money separate from your personal finances to better help you track profit and loss.
  3. Help expand already established business: If you’ve already established a business that’s registered as an LLC or corporation, a DBA could be the perfect way to expand your ventures. For example, if John Doe’s Graphic Designs is already a running business and he wants to create a website to sell designs and host online classes, he could easily file a DBA for JohnDoesGraphicDesigns.com as another branch of his business. Utilizing a DBA to create more business is both a smart and easy way to continue branching.

How To Create A DBA

Depending on what state your business is based out of, you’ll need to file your DBA with either your county clerk’s office or with the state. In some cases, the state doesn’t require you to formally register your DBA at all. This process simply needs to be done if you intend on running your business under any other name than your own. Using a DBA does not trademark your business name, so if this is a concern you can instead look into forming an LLC or corporation.

 

LLC Advantages

  1. Elect how to be taxed: One of the main benefits of an LLC is the flexibility you gain when dealing with taxes. As a freelancer with an LLC, depending on how much money you make, you may have the option to file taxes as a disregarded entity (same treatment as a sole proprietor) or corporation. If you choose to be taxed like a sole proprietor, you’ll be taxed the same as your personal income. On the other hand, with enough revenue you can instead be taxed as a corporation. This would mean a lower corporate tax rate for the first $75,000 your business makes. Having the ability to make this decision is an often overlooked perk of an LLC.
  2. Larger contributions to retirement: An LLC can allow you to put larger amounts towards your savings. With an LLC you have a few options when it comes to saving money for retirement. These types of plans vary from a SEP-IRA, solo 401(k) or defined business plan. As an LLC, you have the ability to decide what works best for you financially and what will benefit you most. Your contribution limits as an LLC are also higher than they typically would be without your registration. This type of saving and planning can have tremendous advantages when it comes time to retire.
  3. Allows leasing assets: Another great benefit of having an LLC is that you have the ability to lease assets under your corporation’s name. This means if you’re a remote freelancer that works mostly from home, you have the ability to lease your home office space under your LLC and write it off as an expense. While this would need to be a legitimate business expense and formal lease paperwork must be involved, it’s another way to help with income. The actual cost of forming your LLC can also be considered an expense to write off as well, so be sure to properly document and save receipts.

How To Establish An LLC

First, you’re going to need to choose a business name that is in compliance with your state’s rules. Next, you’ll be responsible for filing the formal paperwork, known as articles of organization, for your LLC and pay the filing fees. Fees will vary by state. Additionally, some states require that you publish a notice expressing your desire to form an LLC. Lastly, depending on what type of business you’re running, you’ll want to check if you need to obtain any permits or licenses.

 

Corporation Advantages

  1. Boost business credibility: Most clients, customers and potential partnerships see a corporation as a sign of permanence and credibility. This helps communicate stability and encourages positive action when pitching your business to various audiences.
  2. Protect personal finances and assets: Having your business become a corporation greatly aids in the protection of personal assets and finances. While a sole proprietorship faces unlimited liability for personal and business assets, a corporation does not fall under the same rules. In terms of debts, corporations function as a separate legal entity and are therefore typically only responsible for their own finances. Creditors involved in corporation debts can usually only seek payment through the corporation’s assets and nothing else. This helps to avoid the risk of putting personal finances and assets at stake.
  3. Easier capital access: If you’re still getting your business off the ground or simply want to help take it to the next level, you may find yourself in need of a bank loan at some point. Having the added “Corp.” or “Inc.” next to your business name can help in obtaining the capital you need for additional business resources. Banks typically lean more toward lending money to corporations over unincorporated businesses. Corporations can also issue shares of stock.

How To Establish A Corporation

Creating a corporation requires similar steps to establishing an LLC. You’ll need to register the business name you choose to use if planning on using anything other than your legal name. Your name will still need to be cited on paperwork when registering, but won’t appear with the corporation title. In this case, you’ll be filing articles of incorporation to establish your “Corp.” status. This paperwork will be filed with your state’s Secretary of State office. Additional steps, such as establishing directors, may be required depending on the state you register your business in. Licenses and permits will still need to be obtained if necessary for your type of business. More information regarding rules and regulations can be found on SBA.gov.

 

With so many advantages to an EIN, DBA, LLC or corporation, it’s clear why many freelancers utilize these for their businesses. At Emissaries, we highly suggest our freelancers use an EIN and register as a DBA, LLC or corporation in order to qualify as a true freelancer. Please consult a licensed attorney and/or Certified Public Accountant for more information.

 

Nothing presented on this website is intended to be legal or tax advice. Every legal/tax matter is different and this website is merely meant to provide information.