Freelancing has been one of the most widely adopted career paths in the last few decades. In fact, Forbes Councils Member, Aparajeeta Das, writes that the freelance industry will take over 50.9% of the workforce by 2027.
Going solo as a freelancer in the IT industry, in particular, offers plenty of benefits such as more earnings potential, a better work-life balance, and freedom from work politics. That said, why do so many professionals still opt to form a Limited Liability Company or an LLC when freelancing?
Dangers of Remote Freelancing as a Software Developer
Pure freelance work sounds great on paper. However, a Balance Careers article on the Disadvantages of Self-Employment highlights that the advantages you get from freelancing could very well be detrimental to your career. For instance, freelancers don’t enjoy health insurance benefits, paid time off, or a 401(k) account. Freelance work can also be inconsistent or unreliable at times, and there are fewer ways in which you can protect yourself.
These disadvantages also apply to software developers. Additionally, they would have to do a substantial amount of additional work managing projects and clients, because it’s essentially like running your own small business. It’s necessary to search for clients, promote your expertise, communicate with them, and negotiate the financial side. Of course, you also run the risk of dealing with problematic and dishonest clients.
Mitigating the Risks for Freelance Software Development
Using popular freelance platforms like Upwork or Fiver could minimize your problems with bad clients, but it doesn’t solve all the issues associated with freelancing. One of the most effective ways freelancers like ride sharers, gig workers, or contract software engineers can protect themselves is by forming an LLC. The Internal Revenue Service (IRS) defines it as a legal business structure that basically keeps your business separate from your personal assets and provides you with other benefits as well.
Setting up an LLC
How to Start an LLC details how you can adapt this structure to your personal needs. Depending on the state you’re in, requirements may differ – however, it all boils down to eight steps. After deciding on a name that’s available in your state, you must file your LLC registration papers, select an agent, and create an operating agreement. You then get your Employee Identification Number (EIN) from the IRS, open a bank account, and start doing business.
LLC Advantages for Software Development
As aforementioned, software development can be volatile because of the higher risk of being sued by unhappy clients – most don’t understand the inevitability of delays and malfunctions in more complex solo projects. Additionally, there are security flaws that can occur, especially if you’re a self-taught developer. You could also get sued for something as simple as copyright infringement.
That said, an LLC offers liability protection for your home, car, savings, and properties outside of your declared business assets. You’re also able to reduce your tax obligations and access certain benefits that aren’t available to non-business filers. LLCs can also mix and match structures, so it’s possible to be taxed as a corporation or partnership if you choose to work with other people. In turn, this could help you keep more of your hard-earned money.
As we mention in our post on Top Predictions for the Future of Remote Work, employees have been seeking to restore work-life balance to their routines, and a good number of them have turned to freelance work to gain this. Freelance software development has its pros and cons, but by forming an LLC, you’re able to reduce the risks of financial devastation. After this important step, you can begin to delve into insurance policies and other measures of protection.