Freelancing - worth creating an LLC to protect yourself? Any disadvantages?

interpolator
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ysalex interpolator
I'm staring to work with longer and more substantial contracts, and it occurs to me that in a worst case scenario, if something goes sour for whatever reason, I could be sued. Is it worth it to start an llc, to seperate my work from my personal assets?

Any polycount freelancers have any experience here? I'm going to contact a small business lawyer, but I thought that I would ask around here as we'll, see what other people think of the subject.

Thanks in advance guys.

- Yuri

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  • Jon Jones
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    Jon Jones polycounter lvl 14
    Absolutely 100% worth it. There's no reason not to. It will require a bit more effort because you have to file your taxes quarterly, some states may have a "franchise fee" that you have to pay quarterly or annually to stay open, and it will cost $200 - 600 depending on your state -- check www.legalzoom.com, that's where I incorporated and it was SO easy -- but it's totally worth it. You can legally write off the expenses of video games, electronics, computer equipment, office space in your home, mileage, etc. If you incorporate and get a good tax guy, you could be saving thousands of dollars per year in taxes, legally. That's all on top of already having a legal mechanism in place to protect yourself and your assets.

    Background: Ran my own company (LLC) for 3 years as a freelancer. Loved it. Also consider how awesome it will feel to have a company that you named that you do business as. The feelings of pride I felt were vastly stronger than I could have imagined.
  • Two Listen
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    Two Listen polycounter lvl 10
    Jon Jones wrote: »
    Absolutely 100% worth it. There's no reason not to. It will require a bit more effort because you have to file your taxes quarterly, some states may have a "franchise fee" that you have to pay quarterly or annually to stay open, and it will cost $200 - 600 depending on your state -- check www.legalzoom.com, that's where I incorporated and it was SO easy -- but it's totally worth it. You can legally write off the expenses of video games, electronics, computer equipment, office space in your home, mileage, etc. If you incorporate and get a good tax guy, you could be saving thousands of dollars per year in taxes, legally. That's all on top of already having a legal mechanism in place to protect yourself and your assets.

    Background: Ran my own company (LLC) for 3 years as a freelancer. Loved it. Also consider how awesome it will feel to have a company that you named that you do business as. The feelings of pride I felt were vastly stronger than I could have imagined.

    I was under the impression that, assuming your LLC is just going to have you as the sole owner and member, that taxes aren't any different than if you didn't have one and were simply "self employed". Am I mistaken in thinking your LLC needs to be larger than just you to get any real tax related benefits you wouldn't normally get without it?

    Edit: Looks like it sort of depends, with several options being available. "The more you know."
  • Jon Jones
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    Jon Jones polycounter lvl 14
    I don't know much more than this about specific tax rules, but I'd think that's not the case simply because you can write off your home office space by its square footage as a business-specific expense. I don't know if it's the same for a non-LLCed freelancer, though. As I think of it, every business tax break that comes to mind -- writing off business trips, using your LLC to buy a company car and take advantage of those benefits, etc -- I gotta say I honestly don't know if you can do the same as an individual or not. I never cared much about those rules until I was already a business, frankly. haha :)
  • MM
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    MM polycounter lvl 13
    AFAIK, there is no tax benefit (nothing significant anyways) if you are the only person in your company. personal tax can still take out everything business related to a certain extent.

    i have been writing off my home office rent (50% of annual rent maximum allowed) along with internet fee, transportation, office supplies, hardware, software, etc. anything else i needed that year that was for the business.

    so from what i have been told by my lawyer, it is no different. on top of that you would have to pay a fee for setting up a company.
  • low odor
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    low odor polycounter lvl 13
    You can claim all those things as a Sole Proprietor as well using a Schedule C form- ( http://www.wikihow.com/Prepare-a-Schedule-C ) ..You can also file a company name without LLC using a DBA ( http://www.sba.gov/content/register-your-fictitious-or-doing-business-dba-name ). LLC definitely helps separate your personal assets from company assets. One thing to keep in mind is that it is not a magic shield, you can still be held personally liable in many circumstances, even with an LLC


    lol I am like the only guy on polycount without a lawyer...suppose I should get one
  • Jon Jones
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    Jon Jones polycounter lvl 14
    Aha! Thank you, MM. I hadn't realized that gap in my knowledge until I typed the previous post.

    For what it's worth, I did later grow to one full-time employee and two contractors and kept doing my taxes the same way through the business.
  • MM
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    MM polycounter lvl 13
    yup, i have been filing under schedule C all these years.

    speaking of liabilities, it really never really bothered me.

    few of my personal rules:

    first, i always try to stay away from shady clients. I usually never take work from individuals and only take work from established companies.

    second, legit clients have better things to do than waste their time in frivolous litigation against a self employed artist who is not a millionaire.

    third, read your contracts and be very specific with what clients want as final delivery files and when they are due. if you deliver with quality and in time then everything else should be golden.

    also, if you set up a S Corporation (or LLC) then you will most likely have to pay quarterly taxes (estimated taxes). this is usually a problem for me since i rarely know how much income i will have in future. i just pay a small fine annually to avoid quarterly taxes (~$200) which i eventually distribute among several contracts anyways.
  • ysalex
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    ysalex interpolator
    Talked to a friend who is a lawyer, explained to me that you don't want to do much business in your own name, and that an LLC will give you quite a bit of protection as long as you take the necessary steps to keeping business seperate from personal - I.e. set up a business bank account and under no circumstances use that account for personal purchases, and a couple other things.

    MM I agree that if everything goes perfectly, you have no real reason to worry, but for me it's more about the piece of mind of keeping that .001 percent from happening if you get a real shit or devious client.

    It was also explained to me the taxes aren't effected much if you are the single employee, although you might have to swallow a couple extra fees, either annually or quarterly depending on where you live.
  • Frezno
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    Frezno polycounter lvl 5
    What sort of circumstances are you scared of getting sued under ysalex? I've begun doing some freelance while I'm searching for another job, but it would seem to me that you would have to really go out of your way to give an employer reason to sue you. I'm just curious, as I could think of a few possible situations but I'd like to hear more as to what sort of specific situations you had in mind. Also, how does setting up an LLC protect you from these situations? Now you guys have me worrying that I might need to consider doing the same...
  • ysalex
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    ysalex interpolator
    Well, it's hard for me to imagine the circumstance under which it would happen, but the point is mostly you never know.

    Perhaps you miss a deadline. Missing the deadline causes the client to miss a pitch meeting or something, and in turn they seek a suit against you for breach of contract, including damages for the missed opportunity.

    I know it seems far-fethched, because it is, but it does happen in the litigious united states.

    So if you are doing business as a person, and damages are being sought against you personally, everything you own can be seen as collateral for the damages - house, cars, savings, etc.

    If you are behind a true LLC (limited liability company), it is the LLC's assets that seen as collateral, so the company bank account, cars the company owns, computer equipment etc.

    ______________

    Is it going to happen in the games industry? Probably not. The stakes just aren't really that high, but who knows? So I suppose from a risk avoidance point of view, why not?


    _______________

    I'm not saying this is the way it is, I'm saying this is the way I understand it, and I'm asking for opinions etc.
  • Frezno
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    Frezno polycounter lvl 5
    Hmm, that makes sense. Thanks for clearing that up. I'd say go for the LLC then.
  • ysalex
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    ysalex interpolator
    After more discussion with people (lawyer, wife, other people) I've decided I'm going to do this. I went to fill out the paperwork but I need a name.

    My first thought was "raytraipser studios"... But haha that's stupid. I need to show the world how pithy and clever I am. All the good keywords are taken at this point - clay, pixels, etc.
  • Jon Jones
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    Jon Jones polycounter lvl 14
    If you can't figure out a name, you can just incorporate in your own name so you can get it going, then look into a Doing Business As name: http://entrepreneurs.about.com/od/businessstructure/a/doingbusinessas.htm
  • JasonLavoie
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    JasonLavoie polycounter lvl 12
    *Bookmarked, awesome thread :)

    Good luck ysalex!
  • nyx702
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    nyx702 Polycount Sponsor
    Yea some great information in this thread. Subscribing. Glad to see you getting more and more work ysalex!
  • Count Vertsalot
    It makes sense to protect your family with a LLC. Any assets that you own, even if your wife/husband co-signed for it, is fair game for litigation without a LLC. You need to become a completely separate entity away from your family when doing business to protect them.

    If you're running solo, it just boils down to what you want to risk.
  • Jon Jones
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    Jon Jones polycounter lvl 14
    It makes sense to protect your family with a LLC. Any assets that you own, even if your wife... <snip>

    I totally misread that as you calling your wife property.
  • EarthQuake
    Yeah, Jon, as MM points out, all the tax breaks you mention apply to a sole-proprietor/independent freelancer filing under a section C. Really, all freelancers should pay their taxes quarterly (you don't need to file a return quarterly) unless your earned income is irregular (ie: 90% of income earned in one quarter).

    An LLC is (as the name implies) all about limiting liability, so it gives you extra protection in the case that you get sued, or your business falters and you need to file bankruptcy (afaik your LLC can file for bankruptcy without ruining your credit as an individual).

    Now, I can't really see why it would be a bad idea to start an LLC, other than the required paperwork etc, but honestly for an individual contractor it probably is not necessary. However, If you're dealing with very large contracts, and especially if you're sub-contracting work I think it would be more important. The fact of the matter is, most individual freelancers probably aren't dealing with contracts worth the amount of money that a studio would come after you in court over a disagreement (the court fees would likely outweigh the cost owed), but again, if you're dealing with very large contracts that may not be the case.

    There is another reason entirely to consider an LLC though, work experience for the purpose of getting a work visa in a different country. Filing as an individual/section C may not count as actual work experience. This may vary depending on what country you live in and what country you would like to move to, so just something extra to consider.

    At the end of the day though, I would talk to a lawyer and tax professional, and not take advice solely from people on polycount for something like this. (edit: oh I see you've done this already, good deal).
  • low odor
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    low odor polycounter lvl 13
    Was looking up what you are liable for in an LLC...and came across this...most of it doesn't apply to the joe shmoe freelancer..but number #5 covers the liabilities.seems pretty straightforward..

    http://www.thellcexpert.com/articles/llc_business_mistakes.htm

    You should also look up the laws of the state your contract sets the legal venue in...Most of the time contracts have clauses that state where litigation is to take place in the event of a dispute...

    I can see why having a lawyer on hand to browse contracts is probably a great idea
  • Dudestein
    Awesome thread. This is all stuff I was reading up on a few months back. It's great to get advice from some of you guys that have already gone through it.
  • MM
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    MM polycounter lvl 13
    yes, it never hurts to cover your back from any liabilities but if you ask me i think it is more hassle that it is worth if you are the sole member of the company.

    i believe a company is even more likely to take litigious actions against another company than an individual.

    either way, it is your choice. i just think that it might look a bit pretentious to clients and also be an overkill for one single freelance artist to form a company of his/her own.

    also, make sure to read up more on single-member LLC:

    http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies

    http://www.myllc.com/single-member-llc.aspx
  • Jon Jones
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    Jon Jones polycounter lvl 14
    MM wrote: »
    i just think that it might look a bit pretentious to clients and also be an overkill for one single freelance artist to form a company of his/her own.

    Something I see a lot when I'm contracting artists is them approaching me as a single freelancer under their own name, then using an LLC name on contracts and invoices. I've always thought that seemed professional.

    BTW, props to you, MM, for kickass advice here. I'm learning stuff!
  • MM
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    MM polycounter lvl 13
    sure, no problem

    i am learning stuff as well :poly121:
    Jon Jones wrote: »
    Something I see a lot when I'm contracting artists is them approaching me as a single freelancer under their own name, then using an LLC name on contracts and invoices. I've always thought that seemed professional.

    yup, i guess it can go both ways. my personal experience has been positive so far and clients seem to have a certain level of trust dealing with me (my name) directly and hold me accountable for anything. which probably means i am carrying more liability on my end.

    who knows, depending on situation i might eventually have to form a company and work under it if things get tricky.

    i am now interested to know what most studios prefer when dealing with off-site contract artists!

    do they like dealing with individual artists, or LLCs ?
  • Brandon.LaFrance
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    Brandon.LaFrance Polycount Sponsor
    tumblr_mghc4yYxaK1ry10fwo1_400.gif

    Bookmarked. Not quite ready to actually use any of the advice in this thread, but it will be so helpful when that time comes for me.
  • Jon Jones
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    Jon Jones polycounter lvl 14
    MM wrote: »
    i am now interested to know what most studios prefer when dealing with off-site contract artists!

    do they like dealing with individual artists, or LLCs ?

    Aside from thinking "oh, he's incorporated, I need to give them a 1099 tax form instead of a W-2 then," it makes no difference to me at all if I'm only dealing with one person. But if you're more than one person working together as a group and you're not incorporated, that seems fishy, since my legal recourse in case of a breach of contract and seeking damages would be a lot more complicated with a bunch of people rather than a company. And it's not *that* much to incorporate if you're an operation of more than one person, so not being incorporated in that case would make me suspicious.
  • almighty_gir
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    almighty_gir sublime tool
    as far as i'm aware, in the UK the equivalent to this is a .LTD (Limited company).

    When you set up a limited company, you need to make sure you can afford to pay yourself a salary (even if it's minimum wage, for part time hours, roughly £7.5k per year) from the company, otherwise it goes bankrupt. you, as the owner of that company are also employed by it. which means that should it go bankrupt you are protected personally. similarly any legal pitfalls your company should land in, only affect the company and not you personally.

    as well as your salary, you can also pay yourself a dividend from the company monthly, quarterly, or annually as you choose, from whatever profits you make.

    so as long as you earn more than 7.5k per year (which you should be), there's no reason not to do it.

    also, there are some companies out there who have flat out refused to work with me before i went limited.
  • Jon Jones
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    Jon Jones polycounter lvl 14
    also, there are some companies out there who have flat out refused to work with me before i went limited.

    Interesting! Did they give any indication as to why? Did they require you to buy insurance to cover their potential losses in case you breached contract?
  • ysalex
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    ysalex interpolator
    as far as i'm aware, in the UK the equivalent to this is a .LTD (Limited company).

    When you set up a limited company, you need to make sure you can afford to pay yourself a salary (even if it's minimum wage, for part time hours, roughly £7.5k per year) from the company, otherwise it goes bankrupt. you, as the owner of that company are also employed by it. which means that should it go bankrupt you are protected personally. similarly any legal pitfalls your company should land in, only affect the company and not you personally.

    as well as your salary, you can also pay yourself a dividend from the company monthly, quarterly, or annually as you choose, from whatever profits you make.

    so as long as you earn more than 7.5k per year (which you should be), there's no reason not to do it.

    also, there are some companies out there who have flat out refused to work with me before i went limited.

    I didn't expect that last bit, I would have thought it was closer to what MM said, about seeming pretentious or perhaps just overly optimistic.
  • ysalex
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    ysalex interpolator
    Okay so I've done all the paperwork I can without having a name, but now I have to name it. I have literally no good ideas. Any suggestions? I don't want a clever name or a pun, just something fun that i can grab the .com domain without havin to add studio to the end. Moonballon.com is taken.
  • Jon Jones
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    Jon Jones polycounter lvl 14
    No specific suggestions, but I wrote up some guidelines for a good domain name that could be used as helpful creative constraints in finding a good name.

    Here's the link: http://www.jonjones.com/2011/11/17/artist-tip-first-impressions-matter-buy-a-domain-and-email-from-there/
  • ysalex
  • Jon Jones
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    Jon Jones polycounter lvl 14
    Cool, good luck figuring out a name and grats on doing all the paperwork for this! It's a big deal. :)
  • kat
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    kat polycounter lvl 13
    ...When you set up a limited company, you need to make sure you can afford to pay yourself a salary (even if it's minimum wage, for part time hours, roughly £7.5k per year) from the company, otherwise it goes bankrupt. you, as the owner of that company are also employed by it. which means that should it go bankrupt you are protected personally. similarly any legal pitfalls your company should land in, only affect the company and not you personally...
    It's not quite that straightforward in the UK. Currently company owners are not obliged to pay themselves a minimum wage (caveat: unless claiming the new "employee owner" status) et-al... They do however need to ensure payment of a min wage to employees...
    Not entitled to the minimum wage

    The following types of workers aren’t entitled to the minimum wage:
    • self-employed people
    • company directors
    • ...
    http://www.hmrc.gov.uk/migrantworkers/nmw.htm
    https://www.gov.uk/national-minimum-wage/who-gets-the-minimum-wage

    Obviously it goes without saying that an appropriate Business/Company Official should be consulted beforehand because it depends wholly on your situation.
  • Sandbag
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    Sandbag polycounter lvl 14
    To expand on almighty_gir's last point - I've worked for one company (as a subcontractor) who required all contracting be done through a formal company and would not work with independent contractors directly as per policy set by their legal department.

    There have been a few others I have come across who preferred but did not require it, but in the last two years of freelancing it has only ever been a requirement once. I'd have done it sooner myself but Illinois likes to make the process painfully slow and expensive.
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