- Which business structures to consider for your business
- The advantages of running an LLC
- How to set up your LLC
Join The Discussion In Our Community
Click the play button below in order to listen to this episode:
Send Us Your Feedback!
Business Structures and Terms
[00:00:00] Brian: Hello and welcome back to another episode of the six Figure Creative Podcast. I'm your host, Brian Hood. If this is your first time listening to the show, first of all, welcome. This podcast is for creative freelancers who are trying to earn more from their creative skills without selling their souls.
[00:00:12] Brian: You came out on a good or kind of weird time. I don't know. This is a series I've been doing. This is the first episode in that series called Back to Basics, where I'm walking freelancers through the basics. Freelancing in a lot of different areas and I have a lot planned for this. So if you missed episode 250 where I talk through the vision for this entire series, go back and listen to that.
[00:00:28] Brian: And also feel free to go through the other 250 something episodes of this show cuz there's a lot here for you if you're a returning listener of the show or viewer on YouTube. Thanks for coming back this episode. I'm just gonna get straight into it. We're gonna discuss going L L C or sole proprietor.
[00:00:42] Brian: This is just for US based business owners. So if you're from other countries, I apologize, but that's just kinda what you get when you're going through the basics. And we're talking about business things, I can't cover every business entity in every country, cuz I only know what's in the usa.
[00:00:54] Brian: So this episode, I wanna dive into how long I avoided LLCs, why I avoided LLCs for [00:01:00] so long as a freelancer, and ultimately, what you should decide for yourself as a freelancer if you are trying to make the decision right now. Should I be sole proprietor, which is just I am doing business for myself, by myself, or should I be a limited liability company?
[00:01:15] Brian: Now there are some major differences between a sole proprietor and an llc. They can look and feel the same and there's a lot of things I've learned recently, which I'll talk about in a second.
[00:01:23] Brian: But let's first dive into what a sole proprietor is when you start doing business in the us. As a freelancer generally is who I talk to and what you likely are. If you start doing any sort of commerce in the US and you don't have a business entity, you are by default a sole proprietor.
[00:01:36] Brian: That means any money you make as a sole proprietor or as a freelancer, it just gets taxed on your individual, tax return. Let me stop here and just say, I'm not a tax attorney. I am not an accountant. I'm not a C P A. This is not legal advice. I play it professional on the internet.
[00:01:51] Brian: take what I have to say with a grain of salt. That being said, I've been doing this for a lot of years, so I know some stuff, so I'm not a complete fraud. But when you start taking money as a freelancer, you are by [00:02:00] default a sole proprietor without doing paperwork. Now, whether or not you're legal, that's a different thing.
[00:02:04] Brian: I'm just saying without paperwork, you are, by definition, a sole proprietor,
[00:02:07] Brian: and that means the money you get should still be taxed and you should still be paying taxes on it.
[00:02:13] Brian: Now the benefit here is there's no real like massive red tape. Talk to a cpa, get things set up. Make sure you have a DBA A, which is doing business as so if you're doing business as a company, like my old recording studio 4 56 recordings. I had my D B A doing business as set up as 4 56 recordings because I was a sole proprietor.
[00:02:31] Brian: My name is Brian Hood. I am an individual. I'm not a corporation. I wasn't back then. And so I was doing business as a business name 4 56 recordings. And and I believe I even had a business permit my CPA said to get one. And so I filled out some paperwork. I got a business permit, I got a dba, and lo and behold, I'm a legitimate business owner.
[00:02:48] Brian: I'm paying taxes. I have a cpa. It's wonderful. I don't have to do, file anything with the state. I don't have to do any annual reports. cuz I didn't know how to do any of that stuff. it just seemed overwhelming to me. I didn't wanna deal with it.
[00:02:58] Brian: And so that's what I did for [00:03:00] way too long, and here's the reason. Being a sole proprietor for way too long can get you into some trouble. When I'm 20 years old, living in my parents' basement where I started my studio and I made $29,000 that first year in the studio, I don't have much risk on either side although my parents might have been at risk, I don't, we're not gonna get into that if I got sued as an individual.
[00:03:20] Brian: I didn't really have that many business assets to lose. so I didn't need a wall up between my personal assets and my business assets, which is what LLC will provide you. So if I got sued as an individual, I could lose my studio's assets. or if I got sued as a business owner, my recording studio 4 56 recordings, if that got sued, I would lose personal assets potentially as well. As a sole proprietor, there is no difference. As far as the government's eyes or a lawsuit as to your personal assets and your business assets, they're in one bucket together. And so the more money you make and the more assets you have, both as a business and in your personal life, the more risk you put yourself at as a freelancer[00:04:00] by not moving to an L L C. So what is an L L C? An L L C is just called a limited liability company. It can be one member, it can be multiple members, it can be a partnership. There's several ways to set it up, but in our case, for most of us as freelancers, we're gonna be known as what's called a single member, L L C. And here's the beauty of a single member, L L C. It is actually way simpler to run and set up than I ever thought. And I waited so long to switch to a single member L L C because I didn't want to deal with all of the paperwork. I didn't wanna deal with the hassle and the headache because I had other companies at the time that weren't my freelancing, that were set up as partnerships, with multiple members in them.
[00:04:40] Brian: those are a little different than a single member llc. But for us as freelancers, The single member L L C, and I'm already getting ahead of myself as to what I prefer is actually super simple. It just took a little bit of paperwork. There's like a couple forms you fill out online and all of a sudden I had a single member, L L C And the beauty of a single member L L C is that it's [00:05:00] known by the government as I got this written down here and my C p A kept saying this, and I didn't know what it means. So I'm gonna try to explain it to you as the best I can. It's a disregarded entity, it's such a stupid term, but whatever all that means is to the government's eyes.
[00:05:13] Brian: You're still a sole proprietor. it's just one tax return. You don't have to have multiple filings. Yes, you still have a little bit of paperwork to do each year. There's like a little bit of ticky tacky stuff you gotta do, but you get the benefits of an llc, which is legal protection.
[00:05:26] Brian: So you are no longer in one unprotected bucket between your personal assets and your business assets. You now have a separator between the two. And this can be really important for those of you who work directly with your clients or if your clients come directly into your office or your facilities, or if you're at a wedding as a videographer or photographer, and you might bump into somebody or hurt somebody.
[00:05:45] Brian: Or if somebody slips and falls, you don't want to have. Those two buckets, personal and professional, and one thing, and the single member LLC puts that wall up. Again, I am not a lawyer. I am not guaranteeing that there's no way for somebody to sue your business and get [00:06:00] your personal assets. I'm not saying that.
[00:06:01] Brian: I'm just saying from what I understand, to my limited knowledge, this seems to be the best thing to set up for freelancers because it's the lack of red tape, like the sole proprietor set up. Without all the hassle and paperwork of multiple tax filings and having to deal with all that while getting the legal protection of a more complex L L C. So if you are currently a freelancer and you're a sole proprietor, there will come a time it makes sense to jump up to an L L C. to join the big kids club. In other words, and that time will come when either you start earning enough money from the business and you start having enough personal assets like a home car, equipment, gear, or you don't want those two things touching each other.
[00:06:47] Brian: You don't want the legal.
[00:06:49] Brian: Possibility of one taking down your business and your personal assets in one fell swoop. And if when that day comes, you want to make that switch, or that shift from sole proprietor [00:07:00] to llc. Now, there's a few other reasons why an lll C makes sense, especially if you move up to what's called an S-corp election.
[00:07:05] Brian: I'm not gonna get into all that. That's a little more advanced. By the time you need that, and by the time that even makes sense from a tax savings perspective. You will have your own CPA and they will walk you through all of that. But you're talking to me right now. I'm not a cpa. I don't know much about this at all. I know what enough to be dangerous. So you still wanna do all your own research beyond what I'm saying here, but I'm just bringing up the basics for all of my listeners who don't know the basics. A single member, LLL C is a relatively safe and secure and wonderful thing to set up as a freelancer.
[00:07:35] Brian: And if you are like me, and if you avoided it for way too long because you were afraid of how much work it would be and how much you would have to shift and change. Here's one more little tidbit actually I didn't realize, is when you shift from a sole proprietor to a single member, L L C, this, This is according to my cpa a.
[00:07:52] Brian: Yours might be different. I don't know. From what I understand, there's not this crazy reset that has to happen from taxes and bookkeeping because it's [00:08:00] still on your personal tax return. So making that shift doesn't have to be this clean break, like all bank accounts have to be shifted over to this L L C and all credit cards and all bookkeeping software has to be shifted over to this.
[00:08:13] Brian: It can be a relative transition over to this new entity. Now, again, that might open up to some sort of legal issues. I don't know. But I'm just telling you from my experience, it was relatively seamless. It wasn't nearly as hard as I thought it would be. And the actual process of creating the L L C and getting my tax ID number from the government, which is called an E I N, it's like your social security number.
[00:08:32] Brian: As an American, you have a social security number, and as a sole proprietor, that's your tax identification number. But as an L L C, you have something called an E I n, an employer identification number, I think is what it's called. and that's your identifying number once you become an L L C. That whole process was way easier than I thought it would be. So if you wanna see, gonna make a whole video going over how I created my l c, what I use, what it costs me, what you should consider whenever you're creating yours.
[00:08:55] Brian: So if you wanna see that video, you can just go to six figure creative.com/llc. You can [00:09:00] go there, no opt-in required. I'll just have this all free for you to go through. On your own time. So if you're considering making that switch, go there. That's number six, figure creative.com/llc. The link will also be in our show notes, hopefully this episode is helpful for you. I'll try to make the future ones a little tighter, a little better planned, but I just had a lot of thoughts around this. I wanted to get out.
[00:09:19] Brian: And I have many more episodes for this series plan. So if you have any thoughts, any ideas for what you wanna see or hear on the back to Basics episode series for this podcast, just email me firstname.lastname@example.org.
[00:09:31] Brian: Thank Until next time, thank you so much for listening to the six Figure Creative Podcast.
Sign up to receive email updates
Enter your name and email address below and I'll send you periodic updates about the podcast.