Should freelance journalists get an LLC? A Q&A with financial expert Chase Spenst 

As a full-time freelance journalist for a little over two years now, I’m used to checking the “individual/sole proprietor” box on W-9 forms when signing contracts with new publications. I’ve put off looking into the other options — with alphabet-soup names like C-corp, S-corp and LLC — in part because, like many of you, I fell into freelancing somewhat accidentally, not because I love setting up businesses or pondering the tax pros and cons of various pieces of paperwork.  

But as your trusty freelance beat leader who’s not planning to return to the traditional workforce anytime soon, I figured it was time to learn a bit more about what some of my more established freelance colleagues have secured: An LLC, or limited liability company — a structure for a formal business. 

To help break down what such a title can and can’t do for freelance journalists, I talked to Chase Spenst, a tax accountant who works with a lot of freelance creatives at the company he founded, Good Operator. Here’s a lightly edited breakdown of our conversation. 

For someone who knows very little about LLCs, how do you even start to explain the pros and cons? 

There are three lenses I like to apply: There’s the legal perspective, the financial and tax perspective, and the business perspective. I’ll start with the legal perspective because I think it’s the most important.

Legally, an LLC is essentially the entity that allows someone to form a company without having to create all of the infrastructure of a full company. In particular, the benefit to freelancers is an isolation of legal risk and an insulation of your personal assets.

For example, if you’re involved in a lawsuit where there’s some sort of financial exposure, if you’re working as an LLC, the extent of that exposure goes as far as the LLC. It can’t go into your personal assets, it couldn’t go into your spouse’s assets. It creates this firewall between those two, which is extremely important and valuable for obvious reasons.  

As a sole proprietor, on the other hand, if anything happens, whatever you’re commingled with personally, that all becomes a risk.

How might that play out for freelance journalists in particular? 

For writers, there’s not a ton of product liability, so most people do just fine without an LLC. But if it was me, I would want an LLC. And I want my wife, who is a freelancer, to have an LLC. 

Here’s why: Let’s say you take an assignment, and then something happens where the company is sued because of it. If, in your contract with that publication, there’s a clause that basically says, “should you screw up, we can pass this to you,” you could be on the hook. It doesn’t matter if you just did what you were told to do or quoted someone accurately. The more you seem to have at risk, the more likely someone is to actually pursue [a lawsuit to seize it].

So, if you have a small LLC that they guess has about $10,000 in the checking account and which, by the time a lawsuit got deeper, would be cleaned out, why would they spend the money to sue you? 

It’s not so much about what happens if the suit goes to court. The most important thing is creating something that prevents you from ever being in court in the first place. The more barriers you stack up, the worse the return on legal fees becomes for someone else. An LLC adds a pretty big speed bump on that kind of path. 

So from the legal perspective, if that’s all an LLC is doing — even in states like California and New York, where it’s kind of a pain to set them up and you owe extra taxes and there are fees every year and stuff like that — I think it’s still worth having that peace of mind. 

What about the business perspective? 

Maybe you get a ton of work so you’re going to subcontract to other freelancers or start a small agency. Then it makes sense having an LLC. But for freelancers just writing themselves, there’s a more limited business case for an LLC. 

One, though, is that a lot of states have pretty strict contractor laws to prevent companies from taking someone who should be an employee and making them a contractor to avoid paying benefits or sales tax. 

The unintended, but very foreseeable, consequence of this is that it makes it harder for organizations to hire contractors or freelancers. Because if I was [a publication] looking to hire you, I’m instantly at risk if you’re a sole proprietor. If you decided you didn’t like working with me or whatever, you could theoretically file a complaint that you should have been an employee. 

Again, it doesn’t matter if you’re right or wrong. Either way, now I as a publication have to spend a whole bunch of money to defend my position about why you were a contractor and not an employee. I’ll probably win, but it’s a major hassle and I could easily say, “I’ll give you a $10,000 settlement to make this go away.” People know that, and people do it. 

So employers are at more risk using independent contractors, which makes the market for freelancers weaker and means they’re going to get paid less. 

But if instead of contracting with Anna, I’m contracting with AM LLC, it would be very hard for you to make a case that I miscategorized your LLC as an employee. So you potentially could book more jobs as an LLC than just a person because you’ve cleared up that gap.

How do you explain why an LLC is a good or bad idea when it comes to taxes? 

An LLC can choose how it wants to be taxed, and you’ve got two options. First, as a sole proprietor, which is exactly the same as if there is no LLC: Whatever money comes in, you’re taxed on it. So let’s say you made $100,000 in income: You’re going to get taxed at $100,000 net income and pay a self-employment tax — which might be around 10% to 13% — on the whole $100,000 as well.

The other option as an LLC is to file as an S-corp, which makes you an employee of your company. So let’s take that same $100,000 income. Now, you have to run payroll for yourself, and maybe you choose to pay yourself $50,000. You still pay income tax on $100,000, but now you don’t have to pay self-employment tax because you pay payroll tax

So, scenario 1: Income tax on $100,000, self-employment tax on $100,000. Scenario 2: Income tax on $100,000, payroll tax on $50,000. So you can see that something like 13% of $50,000 versus 13% of $100,000 is pretty meaningful money. So getting an LLC and filing taxes as an S-corp offers a big opportunity to save some money.

Usually, it’s recommended that if you make under $50,000, don’t bother filing as an S-corp. It’s a hassle and probably not going to make that big of a difference. But once you get over $100,000, I would probably set up an S-corp. 

Any other pros and cons to setting up an LLC? 

Sometimes people just like the professionalism of having an LLC. And if something makes you feel better or more professional or more confident, great. 

The only downside is paperwork and filing fees. The LLC tax return is more expensive than just doing a personal tax return. 

There’s also a cost to setting up an LLC. You can create one online, but I’d rather work with a small boutique law firm to avoid mistakes. It’s going to be more expensive, but if you have any questions or anything happens, they’ll help you sort it out. If the reason you’re getting an LLC is to create this protective layer against your personal assets, I’d want to hire someone who’s taking professional responsibility over the result.

If you needed to wind down an LLC because, say, you get a staff job, that comes with cost as well. Even if you just shelve it, you still have to file something that says it’s inactive.

So part of the question comes down to: What is your risk tolerance? Is freelancing something you’re going to do for a few months while you’re waiting for another gig, or is it one of those things that you think you’re going to do for a year but six years later you’re still at it? It depends on the individual. There’s not a risk, just cost.