Freelancers and LLCs: Not as Much Protection as You Think

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.

Warning! Rules regarding LLCs can vary by state. Please check with your state for information on specific rules, laws, protections, or lack thereof.

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?

Not necessarily.

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.

Disclaimer: I am not an attorney. Nothing in this article is meant to serve as legal advice. Please consult with a licensed attorney in your state to discuss business structures, liability concerns, or other issues related to your business. Please consult with a licensed insurance professional if you would like to discuss liability protection and insurance options.

Profile image for Jennifer Mattern

Jennifer Mattern is a professional blogger, freelance business writer, consultant, and indie author. She runs numerous websites & blogs including All Freelance Writing, Freelance Writing Pros, NakedPR, and Kiss My Biz.

Jenn has 25 years' experience as a professional writer and editor and over 20 years' experience in marketing and PR (working heavily in digital PR, online marketing, social media, SEO, new media, and thought leadership publication). She also has 19 years' professional blogging and web publishing experience (including web development) and around 18 years of experience as an indie author / publisher.

Jenn also writes fiction under multiple pen names and is an Active member of the Horror Writers Association.

Subscribe to the All Freelance Writing newsletter to get freelance writing updates from Jenn in your inbox.

24 thoughts on “Freelancers and LLCs: Not as Much Protection as You Think”

  1. Good post!

    Many people don’t realize that being a freelance writer is a business and you must act like a business owner. This includes creating a budget and business plan and deciding to form an LLC or incorporate.

  2. Timely blog! I have actually called insurance companies about E & O insurance, but have been refused because I don’t make enough (yet). I’m going to be calling back those two companies about professional liability insurance and add E & O later when I make more mullah.

    Thanks, Jenn, for this post. It’s most helpful, indeed.

    • It can certainly be frustrating. I’ve had an easier time finding professional liability insurance policies over E&O policies too. Unfortunately many companies seem completely uninterested in offering E&O to freelance writers, bloggers, and authors. And the few I’ve seen are so specialized that there’s very little flexibility in their plans (which tend to be worse than E&Os offered elsewhere for other professions). I thought it would easier for me to find a policy than my hubby (a software developer), but I was wrong. They seemed much better equipped to deal with his industry.

  3. You have done veteran and aspiring freelance writers a great service with this post Jennifer. Many naively believe some, if not all, of these myths about LLCs.

    Liability insurance is the smart way to go if you ask me. Even though it is unlikely to ever be called upon, much like any other type of insurance, it is better to have it and not need then the other way around.

  4. Thoughtful, in-depth analysis, JM. There must’ve been something in the air today, with all this LLC talk. (Hat tip to Cathy Miller, who let me know you’d posted about it, too.)

    Oddly enough, I also heard a lawyer speak to a networking group about independent contractor laws just this morning. One of his main points was that it’s important for a company to be able to validate your status as a 1099 worker, and having a corporation, EIN, business bank account, business cards, etc., all serve to do that. Companies don’t want you suing them for OT, benefits, and FICA–particularly since it’s double damages if they lose!

    That said, my opinions about the benefits of incorporating have as much to do with psychological aspects (“I’m a real business, Mom!”) as the legal ones. But, as you say, it’s not for everyone.

    • I certainly don’t have a problem with people incorporating or setting up limited liability companies if it suits them. I just don’t want people to do it for the wrong reasons thinking they’re protected in circumstances where they aren’t. No harm in having an LLC. It’s just about knowing when to also have insurance as a backup.

      I’m not sure I’d ever incorporate for sake of feeling validated, but I couldn’t fault someone else for doing that if it made them feel more professional in some way and kept them focused on treating their business as a business. It’s in my plans (corporation; not LLC), but not until an expansion on the publishing side of things when I’ll be dealing with more contractors and vendors. I’ve actually known more than a few freelancers who had problems after incorporating because clients wanted an independent contractor as opposed to hiring a more formal company, and it led to issues with getting paid, handling contracts, inappropriate probing into a freelancer’s personal information, and such. Some clients just couldn’t wrap their heads around the corporate issues, so they’d try to treat those writers exactly the same as sole proprietors. There are upsides and downsides to every option I suppose.

      • Huh. That’s really interesting, Jenn. I’ve never had a client issue about being an LLC, and I’ve been operating that way since 1999–and I always position myself as an independent contractor. Proof that every freelancer-client interaction is unique. Ya never know! Thanks again for a thought-provoking piece.

        • That’s why I mentioned it happens when incorporating — a slightly different animal than an LLC (which is frequently mistaken for a type of corporation). Tax reporting laws are a bit different when they hire you as an actual freelancer vs the owner/employee of a corporation — W-9 requests and 1099 reporting being common examples.

  5. Every year I ask my tax guy, an enrolled agent, if I should incorporate somehow and every year so far he says it’s not necessary. I’m a sole proprietor and since I work out of my office on my own equipment and to my own schedule it would be darn hard for me to sue the xyz company saying I was an employee and they owed me something.

    I get validation from lots of things, but being a corporation sounds like more of a nuisance than anything… it’s expensive, requires renewals and I don’t see the benefit.

    If my tax guy ever says I should incorporate I’ll either ask him how to reduce the size of my business so I don’t have to or go for it… we’ll see.

    I like this post, Jenn.

    • I don’t worry too much about the issue of companies wanting it clear that you’re a contractor. I’ve actually not come across any clients who had that concern. What I come across far more often are clients looking to hire freelancers where they get the tax benefits of calling them contractors, but where they try to overstep and act in the capacity of an employer. They’re actively trying to skirt the laws by incorrectly classifying people they hire. And really, that’s what matters. As long as they do their job and follow the rules about what they can and can’t do, and can and can’t require of freelancers, they should be fine.

    • I think it’s less about the actual benefits an LLC might offer for some freelancers and more that they believe a sole proprietorship isn’t a “real business” and the LLC structure will give them more legitimacy. That’s silly though. They’re both business structures. And they share many similarities. Both have their benefits and drawbacks. It’s all about picking what suits your business in its current state and factoring in your future growth plans.

  6. Well, this is interesting.

    I am an LLC, and do have the sense from my attorney that it provides some protection. As you say, though, depends on the contracts you sign — read them!

    There is a trend toward asking writers to personally indemnify companies they write for, so watch out. When I got a book contract with that is when I looked harder at becoming an LLC and getting insurance.

    And I never thought of the LLC as meaning I didn’t need insurance. I actually wrote a piece about getting a Business Owner’s Policy (BOP) for Entrepreneur a few years back, and after I researched it, I got one for myself!

    It’s about $500 a year and I’d recommend every freelancer have one. You need it for things like: The UPS man is bringing a package to your door that’s business-related, slips and injures himself. Your home insurance does not cover that, I learned — you need the business policy for it.

    The other big protection, of course, is just don’t make stuff up or act unethically. A lot of bloggers think they can say whatever comes into their heads online without any substantiation, and may find out the hard way that they’re wrong about that.

    • I believe Lori Widmer had a recent experience like that, where a client (an insurance company no less) expected her to take on all of the risks, including for decisions and actions on their part. Um, no thanks.

      Unfortunately not everyone realizes that one isn’t a substitute for the other. That’s why I decided to cover this — someone in a conversation came right out and said they didn’t need insurance because they had an LLC. Well sure, until you get sued.

      Most writers won’t ever have to worry about it thankfully. You just don’t want to be one of the few who gets caught up in a legal kerfuffle and finds out you aren’t as protected as you thought. In the litigious world we live in these days (with IP right violators preemptively suing the people they’re stealing from — friggin’ crazy), it pays to be careful.

  7. I did have that experience, Jenn. Didn’t take the risk, either.

    Carol, I think the better policy for you would have been a professional liability policy. BOP is okay, but there are too many coverage gaps given that it’s meant to cover physical locations. An E&O policy or PL policy does a much better job covering the risk.

    Most homeowners policies already cover third-party liability. In order to be certain what is/isn’t covered, it’s best to talk to your agent and go over your specific policy.

    Sorry for the insurance brain dump — occupational hazard. 🙂

  8. Great post, JM! I was coming to the same conclusion. But what if the writer has other assets not related to his or her freelancing activities? Would having the freelance work in one LLC and the others in another LLC help shield one from the other’s liability? Or is it all the same due to the “personal liability” risk that the writer faces? In other words, if the writer is liable for what he or she writes, are ALL the assets he or she owns affected?

    • Your best bet would be to talk to an attorney. Unfortunately I’m not able to give any specific advice here — just general information like that in the post. Every situation is different, especially as it comes to personal guarantees and liability circumstances.

  9. All this seems to reflect only single person LLCs. Why is that? What about 2-person LLCs? Do any of the protections change if it is a 2-person LLC?

  10. Thanks for writing this post. I’ve been in the midst of this same research lately. I thought an LLC would protect me from defamation, libel, and IP claims, but of course, it will not.

    I help parents and grandparents write or record and publish their memoirs for their families so I never know whether the stories they share are true or not. I’m not as concerned with my client suing as I am someone else who is mentioned in the book. I do have best practices I go through to limit potential issues, and I’ve been requesting quotes for media liability insurance (including E&O) this week. The quote I received was $1,200. Do you have a better insurance carrier that you recommend?

    Almost more importantly, I am worried about what will happen after I close my business. Do I need to carry this insurance for the rest of my life because the books are “out there”? Or, am I requesting the wrong kind of insurance? The quote was for a claims based policy.


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