You've probably heard this advice before: to protect yourself professionally, you should set up your freelance writing business as a limited liability company (LLC). The basic idea is that an LLC will protect your personal assets if claims were to arise against your business. But registering your freelance business as an LLC might do little more than give you a false sense of security.
This topic came up recently in a discussion on the About Writing Squared forum where we were discussing insurance options. David Rodeck suggested that having an LLC already protected him from lawsuits against the business, so insurance might not offer much added benefit.
Common Misconceptions About LLCs
Here are some common beliefs freelancers have about limited liability companies:
- Having an LLC will protect your house, retirements and other savings, or other personal assets if your business can't pay its bills.
- Having your freelance business registered as an LLC means people can't sue you over professional disputes; they would have to sue your business as a separate entity.
- Having an LLC as your business structure will protect your personal assets if someone ever does sue your business.
I used to almost blindly believe some of these things too, which is why my original plan was to set up my own business as an LLC. Then I learned some hard truths about LLC status and member liability protection. While these beliefs aren't entirely false, there are some extremely important exceptions you need to know about.
The Truth About LLCs for Freelance Writers
When you set up an LLC as a freelance writer, you're setting up what's called a single-member LLC (whereas a larger company might have multiple members). That's an important distinction from a multi-member LLC, because some of the protections you've probably heard about are tailored toward the latter. They're designed to protect one member's personal assets from the actions of another member. As a freelance professional, you'll be the only member involved.
Here are two important facts about LLCs and the protections they might offer you that you might find surprising:
You might put your personal assets as risk if you can't pay your business debts.
As a freelancer, if you go to a bank and try to get business financing to start or grow your business, it's unlikely they'll approve a loan on your company's credit alone. Instead you'll more likely be asked to sign a personal guarantee. This makes you directly responsible for the debt if the company can't pay it, no matter what your business structure is. But if you want the financing, you might have no choice but to sign this guarantee and give up any personal asset protection you thought you would get.
"That's okay," you might say. "I'm a freelance writer. I don't expect to borrow money."
That's great. And you won't have to worry about loan debt in that case. But you might run into other bills you can't pay. Any service you use where you're billed at the end of the month (or the end of any pay period) instead of up front becomes a debt. If you incur charges (on a business cell phone, website membership, hiring subcontractors, etc.), and you can't pay them, the account could end up in collections.
"But I didn't sign a personal guarantee, so I'm still protected," you might point out.
Be careful with this. When you sign up for online services, for example, you agree to the company's terms of service (TOS). If you don't comb through the legalese carefully, you might find that you did indeed voluntarily agree to personal liability for actions on behalf of your business (especially if you sign up using your own name instead of signing up more officially as the company).
You can be personally sued for your actions on behalf of the company.
This will be the bigger concern for many freelance writers.
As a freelancer serving as the only member of the LLC, you are actively involved in the management of that LLC. Because of that, you take on direct responsibility and can be personally held liable for torts committed in the running of your business.
Torts are basically civil wrongdoings as opposed to criminal acts -- you know, all the things freelancers might worry about being sued over.
For example, let's say you write a blog post bashing someone's reputation, and you publish outright lies. They can sue your business for defamation. But they can also sue you for defamation, even if what you publish is a result of negligence rather than intentional malice.
Another situation where you could be sued personally is if you're accused of fraudulent activity -- for example, lying about important credentials to land a gig. I remember a writer several years ago who was advertising services in a specialty area, claiming that she had a specialized degree that made her uniquely qualified for that kind of job. She would also go on about how that credential justified clients paying higher rates. Okay. Fair enough. But the thing is, she was lying. She later admitted publicly (without realizing it until someone else called her out on it) that she never had received this degree. If someone had hired her believing her to be uniquely competent to handle a certain type of project and they later found out that was a lie, she could have opened herself up to a lawsuit, even if she was running her business as an LLC.
In addition to torts, you have to worry about breach of contracts. In the case of an LLC, a lot depends on how you sign your contracts. If you do so under your own name (instead of your name, title with the company, and full LLC name), you might be held personally liable if accused of a breach.
Another area freelance writers should be concerned about is intellectual property law. What if you're accused of copyright infringement in your blog post, e-book, or something you wrote for a client? Because you're personally committing the infringement and using your LLC to carry out that infringement, you can be sued and held personally liable.
Think of it this way: if you're the one personally responsible for the action someone is suing over, you most likely won't have any liability protection on a personal level. And if you're the only member and employee of your freelance business' LLC, you're probably going to be responsible for all decisions and actions taken.
So, Are LLCs a Bad Idea for Freelancers?
In a single-member LLC, you might not have the liability protection you were hoping for, but that doesn't mean this business structure offers no benefits. Consult with an attorney and accountant to discuss possible legal and tax benefits depending on the needs of your business.
How Freelance Writers Can Protect Themselves
While an LLC (and other business structures) have their benefits, don't rely on them exclusively if you're looking to limit your professional liability. Your best option is to get a professional liability insurance policy, and possibly combine it with an errors and omissions (E&O) policy.
Did you set your freelance writing business up as an LLC thinking it would protect you if your business was ever sued? Did you know that you could still be held personally liable for actions taken through your business? Share your experiences with LLCs, their benefits, and their limitations in the comments below.