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title: Why Web3 Freelancers Need LLCs

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# Why Web3 Freelancers Need LLCs
*Not legal or accounting advice. This article is purely for educational purposes. Everyone's situation is different, so talk to a lawyer or accountant.* 

So you've started contributing to DAOs -- congrats! You've taken the first step into the world of the Web3 worker. While you might be getting paid in stable coins or magic internet money, it's still important to have a professionalized set up and protections for the meat-space you live in ever day. The first step to professionalization for many freelancers (Web2 and Web3 alike) is to setup an entity for their freelancing business. 

## What Kind of Entity Is Right For Me? 
The first step to professionalizing is setting up an entity to separate your personal life from your professional life. 

This separation between the personal and professional is most important because of "liability." In essense, if you don't have an entity that offers liability protection, if a client sues you, they can access your personal assets (i.e. house, car, etc.). If you have an LLC or corporation that you use for your business, if a client sues you, they're limited to the assets of your business, which might be minimal. Limiting your liability greatly de-risks your life. It's not that anyone expects you to do a bad job, but there are asshole clients out there and they shouldn't get a shot at your house. De-risking can be especially important for Web3 freelancers where their DAO's might not have an entity to help sheild them from liability and get them access to benefits. 

What kind of entity is the best for your situation? That largely depends on what you're trying to accomplish. At Opolis, we think that an LLC that elects S-corp status is probably the best for many of our members. We'll unpack what that means later. Let's start with the basics. 

There are a couple basic types of entities relevant to freelancers: 

* corporations (C-corps), 
* limited liability companies (LLCs), and 
* not-for-profits (in very rare cases). 

The main differences between an LLC and a corporation is the default tax status of each. An LLC has pass-through tax status, which means revenue shows up on your personal taxes vs. a corporation pays it's own income tax before it distributes earnings to your personal balance sheet where you pay income taxes again (often called "double-taxation"). The other difference between LLC's and corporations is the level of flexibility. LLC's are extremely flexible and can go from very simple entities for a single person to very complex agreements between multiple people and other entities. Corporations are more plain vanilla and pretty standard. After talking to an attorney or tax advisor most freelancers will discover that an LLC is the best fit for them (but please talk to a tax advisor). 


## Where should I form my entity? 

Both corporations and LLCs are both a state-level creation. You can't create a U.S. corporation. You can create a corporation in any state in the U.S. Same goes for LLCs. Pretty much every state has a statute allowing residents and non-residents to create LLCs. 

Since states use corporations and LLCs as a revenue generator for their states, where you form an entity should be primarily focused on minimizing cost for yourself. Beyond cost, some states have more developed corporate and LLC laws than others, which is key if you end up in hot water and have to go before a judge. When you take cost as consideration #1 and corporate law maturity as consideration #2, it leads to the answer that the best place to form an entity for your freelancing business is your home state, Delaware, or Wyoming.

Delaware and Wyoming are popular because they have well develop corporate laws, Secretary of States offices that make it really easy to create an entity, and relatively low costs. The disadvantage of using one of these states over your home state, is you'll likely have to pay a fee to register a foreign corporation in your home state. However, if you live in a place like NY or CA, paying that foreign corporation fee is far easier than actually forming an entity there. 

At Opolis we default to Wyoming LLCs because we have a partner CloudPeak Law that makes creating a Wyoming LLC very fast, pretty cheap, and easy for our members. 


## What's an S-Corp

As promised above, let's talk about what an S-Corp is and why it's recommended for Opolis. 

An S-corp is actually a federal tax designation. There's no such thing as just an S-corp. You can't file for one in Delaware or any other state. What you can do is tell the IRS that you'd like your C-corp or LLC to be treated as an S-corp for tax purposes (note: you can also elect that your LLC be taxed as a C-corp or have a C-corp that elects S-corp status, both of which also work for Opolis).  

The S-corp election means that your corporation or LLC is treated as a pass-through entity, so net income shows up on your personal balance sheet for taxes. If you're thinking why an LLC needs this, because they're already a pass-through entity, you're asking a great question. Essentially, S-corp status is duplicative for LLC's, except that Opolis needs your LLC to be taxed as a corporation for IRS purposes to co-employ you and offer you benefits. The way to think about this is you start with an LLC --> elect to be taxed as a corporation --> clarify that you want to be taxed more specifically as an S-corp, so you can still take advantage of pass-through taxes. You can thank tax lobbyists for this level of complexity. 

The biggest tax advantage of an S-Corp is that you can pay yourself a "reasonable salary" that counts as a corporate expense (but is subject to payroll taxes) and then pass through any profits to yourself that gets taxed at your ordinary income rates sans payroll taxes and the double-taxation that a C-corp would face on profits. This means with the right balance of salary vs. profits distribution you could save you a few percentage points in taxes on that pass-through income resulting in a few thousand dollars a year in savings for many solopreneurs. The disadvantage of an S-Corp election, especially for some Opolis members, is you can't contribute pre-tax funds to an FSA health savings account or Dependent Care FSA. These tax complexities are why we recommend talking to a tax advisor before deciding whether to do an LLC / S-corp for Opolis or a regular C-corp. 

If you're having any trouble following the above, this is why accountants and lawyers get paid so much money.   

## Conclusion 
There are lots of different levers to pull for freelancers on the entity front. You can get as simple or as complex as you want for your business needs. If you're interested in joining Opolis, one of the services we offer for prospective members is setting up their LLC and electing S-corp status for the low price of $299. If you need to get more complicated than the single-member LLC that elects S-corp status, we can also connect you to so great lawyers that understand the Web3 and freelancer spaces. 
  



