I've been a freelance writer since 2007, happily working as a sole proprietor with various clients. But recently, I actually started missing out on writing opportunities because some clients only want to work with LLCs or corporations. Have you ever had this happen to you?
If you're also wondering whether forming an LLC is right for your business, you're not alone. And honestly? It's a pretty big decision that deserves careful consideration. That’s why I plan to share everything I’ve learned about both the pros and cons of LLCs.
Before we dive into all the LLC pros and cons, let's get clear on what we're actually talking about here.
Disclaimer: This content is for informational purposes only and should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation.
Understanding an LLC (Limited Liability Company)
What is an LLC? At its core, an LLC is a legal entity that exists separately from its owners (called members). This separation is crucial because it means that if something goes wrong with your business – for example, a client decides to sue for some reason – they can only come after the business’s assets, not your personal ones.
LLCs take the best traits from corporations and sole proprietorships and blend them together. They give you the flexibility to run your business without all the corporate red tape.
Think of an LLC like a superhero cape. When you have this cape on, your personal assets (i.e. your house and car) can’t be taken from you in the unfortunate event of a business-related issue.
Want a deeper dive into LLCs? Check out: How to start an LLC in 6 steps – 2025 complete guide
LLC advantages – The pros of a limited liability company
Alright, let's talk about the good stuff first! After diving deep into research, chatting with other business owners, and watching more YouTube videos than I care to discuss on the subject, I've found several compelling reasons why forming an LLC might be worth considering.
And no, it's not just about looking more "official" (though I won't lie - seeing "LLC" after your business name does feel pretty legit).
Here are the advantages of an LLC:
Personal asset protection
Remember how I mentioned that superhero cape earlier? This is where it really comes into play.
The "limited liability" part of LLC isn't just fancy legal speak - it's actually the biggest perk of forming one. It all but puts a fortress around your personal piggy bank that makes it much harder for someone to come after and take away.
If your business runs into trouble (and hey, it could happen to any of us), your personal assets like your house, car, or that vintage comic book collection are generally protected.
This means if someone sues your business or if it goes into debt, they can only come after your business assets, not your personal ones.
Tax flexibility
This is where things get interesting - and potentially money-saving. LLCs are like tax chameleons. By default, they're considered "pass-through" entities, meaning the profits and losses pass through to your personal tax return (similar to how I currently file as a sole proprietor).
But here's the cool part: you can also choose to be taxed as a corporation if that would benefit you more.
You basically get to pick your tax destiny, and you can change it later if your business needs evolve. Plus, unlike corporations, you won't face the dreaded "double taxation" monster unless you specifically choose to be taxed as a C-corp. Talk about having your cake and eating it too!
Credibility boost
Let’s be real for a minute – having “LLC” after your business name can give you an instant credibility boost.
I’ve experienced this firsthand when losing out on opportunities because I wasn’t an LLC. Some clients and vendors simply take you more seriously when they see those three letters.
It shows you’ve taken steps to formally establish your business, which can make a difference when you’re trying to land bigger clients or negotiate better terms with vendors.
Think of it as the business equivalent of showing up to a meeting in a sharp suit versus wearing your favorite comfy sweatpants.
While personally, making the switch won’t change what I do, I can’t deny this is one of the bigger benefits of an LLC.
Flexibility in management
Unlike corporations that require boards of directors and regular shareholder meetings, one of the LLC advantages is that they are pretty chill when it comes to management structure.
Whether you want to run things yourself, split responsibilities with partners, or hire managers to handle day-to-day operations, you’ve got options.
You can be as formal or informal as you like with how you run things (though I’d still recommend keeping good records – future you will be grateful to present you for staying organized).
This flexibility means you can adapt your management style as your business grows without having to jump through too many legal hoops.
And, another one of the key advantages of a limited liability company is that they’re easier to set up compared to creating a corporation. In most states, you can complete the process online in a few hours, though you’ll want to set aside some time to prepare your operating agreement and other important documents.
Ownership and wealth distribution flexibility
LLCs don’t have restrictions on the number or type of owners you can have.
Want to be a solo owner? Go for it!
Looking to bring in a few partners? No problem!
You can even have corporations or other LLCs as owners if that’s your jam. This means that just like your management style can change, your business can evolve as your needs change.
Plus, if you start solo (like I most likely will), but later want to bring in partners, the structure makes it relatively easy to adjust ownership percentages. Just like an expandable dining room table – you can add more seats when needed without buying a whole new table.
You can distribute the profits in whatever way you choose to as well. Maybe one partner puts in more sweat equity while another contributes more capital – you can structure profit-sharing to reflect these differences.
A few more advantages of forming an LLC
Just when you thought we'd covered all the perks, there are a few more benefits worth mentioning. Here's a quick rundown of additional LLC advantages:
LLC disadvantages – The cons of a Limited Liability Company
Now that we’ve covered all the shiny benefits of an LLC company, let’s get real about the potential drawbacks of an LLC. Trust me, as someone who’s been weighing these pros and cons myself, you’ll want to understand these LLC disadvantages before taking the plunge.
Startup and ongoing costs
Let’s talk money – because this is probably the biggest reason I’ve hesitated to form an LLC myself. Unlike my current sole proprietorship setup that basically cost nothing to start, forming an LLC requires some upfront cash.
We’re talking state filing fees (which can range from $50 to $500 depending on your state), potential legal fees if you want help with the paperwork (spoiler alert: you probably should), and in some states, like California, you’re looking at an annual tax of $800 – ouch!
And here’s the kicker – these aren’t just one-time costs. Most states require annual or biennial fees to maintain your LLC status. You’ll also need to factor in costs for a registered agent and annual report filings. It’s a lot like joining an exclusive club – there’s both an initiation fee AND annual dues.
Self-employment taxes
Unless you elect to be taxed as a corporation, you'll still be paying self-employment taxes as an LLC owner. This means you're responsible for both the employer and employee portions of Social Security and Medicare taxes, just like I currently am as a sole proprietor.
The catch? You'll be paying these taxes on your entire net business income. I've seen some business owners get excited thinking that there will be massive tax advantages of an LLC (i.e. that it'll slash their tax bill), but without proper planning (like potentially electing S-corp status), you might be in for a surprise when tax season rolls around.
By the way - here's something else you need to know – as of December 2024, self-employment tax rates are still sitting at 15.3% (12.4% for Social Security and 2.9% for Medicare).
That's a hefty chunk of change coming out of your profits.
This is one of the cons of an LLC that might explain why I keep emphasizing throughout this article the importance of talking to a tax professional before making any decisions. A pro can help you understand whether strategies like electing S-corp status might save you money in the long run.
Paperwork and compliance requirements
Going back to that superhero cape of liability protection - Well, turns out you have to earn the right to wear it.
You can’t just form an LLC and then treat it like your personal piggy bank.
You need to maintain separate business bank accounts, keep detailed records, and generally treat the LLC as a separate entity from yourself.
For example, if you are paying your rent/mortgage on your personal home out of your LLC bank account - you’re doing what's known as dissolving the corporate veil. It could destroy the separator between your business account and your personal property - meaning a court could decide to strip your protection and your personal assets could become forfeit if you get in legal hot water!
And here’s something that’s new for 2024 – most LLCs now need to file beneficial ownership information reports with FinCEN (that’s the Financial Crimes Enforcement Network).
As someone who currently just keeps basic business records, and files a Schedule C with my taxes, this extra layer of compliance makes me a bit nervous.
More complex banking and contracts
When you're a sole proprietor like me, opening a business bank account or signing contracts is pretty straightforward.
But with an LLC, banks often require more documentation, like your articles of organization and operating agreement. Some might even want to see your EIN verification letter from the IRS, proof of your business address, and your certificate of good standing from your state.
Plus, every contract needs to be carefully written to show you're acting on behalf of the LLC, not personally.
No more quick PayPal transactions under your personal name or casual email agreements. Everything needs to be properly documented to maintain that liability protection we keep referring to.
This means being super careful about how you sign documents too.
Instead of just scribbling your name, you'll need to sign as a member or manager of your LLC (for example, "Jane Smith, Member" or "Jane Smith, on behalf of Smith Writing Services, LLC"). It might seem like a small detail, but these formalities matter when it comes to maintaining your liability protection. And while it's a bit more work, think of it as creating a paper trail that proves your business is a legitimate, separate entity from you personally.
A few more disadvantages of an LLC
Here are a few more potential disadvantages of limited liability company that might make you think twice before hopping on the LLC train:
What are the main benefits of forming an LLC?
Let’s put it all together and talk about the bottom line shall we? Why might you want to form an LLC?
Like I said, I’ve been wrestling with this decision myself, and here’s what I see as the key LLC benefits that might make those extra costs and paperwork worth it:
First and foremost, is the liability protection I’ve yammered on and on about.
Knowing my personal assets would be protected if something went sideways with my writing business brings serious peace of mind. As my business grows and I take on bigger clients, that protection becomes even more valuable.
Then there’s the flexibility factor. Unlike corporations with their rigid structures, an LLC lets you choose how you want to be taxed and run your business.
Want to be a solo member? Cool. Thinking of bringing in partners later? Also cool.
No one puts my business baby in a corner!
The credibility boost is nothing to sneeze at either. Okay, let’s get serious here - in weighing the LLC benefits and disadvantages, I’ve also been considering the financial boost the credibility could give my business.
I mentioned earlier how I’ve lost out on some writing gigs because I wasn’t an LLC – and though it’s not horrible, it’s a real thing that has cost me potential income. Those three letters after your business name can open doors, especially with larger companies that only work with incorporated entities.
Choosing the right business structure isn’t just about checking boxes or following what everyone else is doing though. It’s about finding the best fit for YOUR specific situation.
Maybe you’re like me – a freelancer weighing the pros and cons. Or perhaps you’re starting a business with more inherent risks than writing (though trust me, the right words in the wrong place can definitely cause some drama!).
Remember, while forming an LLC isn’t the right move for everyone, it could be the perfect next step for your business.
Just make sure to:
- Assess your actual liability risks
- Crunch the numbers on costs versus benefits
- Consider your growth plans
- Think about how clients perceive your business structure
- Most importantly, consult with legal and tax professionals before making the leap
After all, the best business decisions are informed ones – and that’s true whether you’re choosing a business structure, or deciding what to write about next.
Comparing LLCs to other business structures
Still scratching your head about whether an LLC is right for you?
Let’s break down how it stacks up against other business structures. As someone who’s currently a sole proprietor and has been researching all of these options, I’ll share what I’ve learned about each one.
LLC vs. sole proprietorships
Let me start with what I know best – sole proprietorship. This is where I’m at now, and maybe where you are too. Think of a sole proprietorship as running your business in flip-flops – super comfortable and easy to slip into, but not offering much protection.
The big difference? While my sole proprietorship was basically free to start and requires minimal paperwork, it offers zero liability protection. Sole proprietors don't have that superhero cape we talked about.
If something goes wrong in my business right now, my personal assets are totally up for grabs.
That said, sole proprietorships do have their place. If you’re just testing the waters with a low-risk business or side hustle, starting as a sole proprietor might make sense.
You can always level up to an LLC later when you need more protection or credibility.
LLC vs. corporations
If an LLC is like wearing business casual outfits, a corporation is like showing up in a three-piece suit – more formal, more structured, but also potentially more restricting. Can’t exactly eat a huge meal without your stretchy pants on! Cue the visual of Joey Tribbiani in his Thanksgiving pants.
Corporations come with some serious advantages, especially if you’re planning to seek outside investment or go public someday. But they also come with more rules than a high school student's conduct handbook.
While LLCs give you some sweet tax flexibility, corporations (specifically C-corps) face double taxation – once at the corporate level and again when profits are distributed to shareholders.
That said, corporations might be your best bet if you’re planning to:
- Seek venture capital funding
- Issue stock options to employees
- Eventually go public
- Need to raise significant capital through stock sales
LLC vs. partnerships
Partnerships are kind of like sole proprietorships with friends – simple to form, but everyone’s personally liable for the business.
An LLC, on the other hand, can have multiple members (partners) while still maintaining that crucial liability protection.
Think of it this way: if you and your bestie want to start a business together, forming an LLC gives you the ease of partnership management with the added bonus of personal asset protection. Plus, you get that flexibility in how you divide profits and responsibilities – something that’s typically more rigid in traditional partnerships.
The main trade-off? LLCs cost more to form and maintain than partnerships. But considering you get liability protection without all the corporate formalities, many business owners find it’s worth the extra expense.
Does my side hustle need an LLC?
Ah, the million-dollar question! (Though hopefully your side hustle will be worth more than that someday, right?) As someone who started freelance writing as a side hustle before it became my full-time gig, I get why you’re asking this.
The short answer? It depends. (I know, I know – not super helpful yet, but stick with me!)
If your side hustle is still in the “testing the waters” phase – maybe you’re exploring different side hustle ideas to see what sticks – you might be fine starting as a sole proprietor like I did.
Remember, you can always start as a sole proprietor and transition to an LLC later. That’s exactly what I’m considering now - a decade after my “side hustle” became my primary income source.
Is an LLC good for my small business?
Let’s cut to the chase – there’s no one-size-fits-all answer here. But I can offer some key factors to consider that might help you figure out if an LLC is right for your situation.
Risk level
- How likely is your business to face lawsuits?
- Do you have significant business assets to protect?
- Are you working in a field where mistakes could be costly?
Financial factors
- Can you afford the formation and maintenance costs?
- Would the tax flexibility benefit your situation?
- Are you losing opportunities by not being an LLC?
Growth plans
- Are you planning to expand?
- Might you want to bring in partners later?
- Could you need outside funding in the future?
Client expectations
- Do your target clients prefer working with LLCs?
- Would the added credibility benefit your business?
- Are you missing out on opportunities due to your current structure?
In a nutshell, what I’ve learned through my research and experience is this: forming an LLC makes the most sense when the benefits (like asset protection and professional credibility) outweigh the costs (both time and money) of formation and maintenance.
The key is making an informed decision based on your specific situation. While I can share what I’ve learned about LLCs until I’m blue in the proverbial face, remember that this is just educational information. Your best next step is to take what you’ve learned here and discuss your specific situation with a legal or tax professional who can give you personalized advice.
After all, the right business structure should support your success, not complicate it. And whether that’s an LLC or something else, only you (with proper professional guidance) can make that final call.
