Working in the gig economy can mean freedom and a better income, but it also means personal liability if there's a misunderstanding or accident.
updated November 21, 2023 · 4min read
While gig workers may have more personal freedom than people with traditional jobs, they also have a greater risk of being held personally liable if something goes wrong. A limited liability company (LLC) or corporation, together with a good insurance policy, can help protect you if someone files a lawsuit or claim.
The growing gig economy includes all sorts of workers who work as independent contractors rather than employees, from Uber drivers to freelancers on TaskRabbit or Upwork, to the handyman you found on Craigslist. About 36 percent of U.S. workers are now working in the gig economy, according to Gallup, either as a part-time side hustle or as their primary source of income. But many gig workers don't realize that they are, in fact, running a business, and potentially could be held liable if things don't go right.
When you start doing gig work, you automatically become a sole proprietor. As a sole proprietor, you are 100 percent responsible if something goes wrong in your business life. For example, suppose you're freelancing and you have a misunderstanding with a client about an assignment. Your client sues you, saying you didn't live up to your agreement and it's cost them tens of thousands of dollars. If the client wins, everything you own is potentially on the line, including all of your bank accounts, your car, and your house.
Protection from personal liability is one reason many gig workers set up LLCs and corporations.
In the eyes of the law, LLCs and corporations are separate from the people who own them. If your business is sued, you might lose everything you have invested in it but you won't lose your personal money or property. You should understand, however, that forming a business can't shield you from personal liability for your own negligence.
You'll have the same level of personal liability protection with either a corporation or an LLC. Corporations and LLCs both can be set up with just one owner.
Many gig workers choose to form an LLC because LLCs lend themselves to an informal structure with simpler record-keeping, whereas corporations have a set structure of shareholders and officers and more formal meeting and record-keeping requirements.
LLCs are unique because the IRS doesn't have a specific tax classification for them. Instead, you can choose whether your single-member LLC will be taxed as a sole proprietorship, S corporation, or C corporation.
Choosing the right tax classification can be complicated, and it is always best to get advice from an experienced small business accountant or attorney.
Forming an LLC or corporation helps with liability protection, but your first line of defense should always be insurance:
There are many types of business insurance, including liability insurance, auto insurance, and business interruption insurance. Consult with an insurance agent about the right type of coverage for what you do.
As a working member of the gig economy—whether you need to form an LLC or secure the right insurance protection—once you have your business structure and insurance in place, you can enjoy the potential freedom that gig work brings while protecting yourself and your income.
by Jane Haskins, Esq.
Jane Haskins is a freelance writer who practiced law for 20 years. Jane has litigated a wide variety of business disp...
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