118. Form An LLC For The Right Reasons
The fact is that AB5 does not provide exemptions for LLCs. Its 3-point test governs the working relationship between the client and the freelancer, not the freelancer’s legal business structure.
In full transparency, I believe that freelancer and union are contradictions in terms. Independent contractors are independent and not subject to employers’ oversight, and therefore, being self-determined, don’t need to organize into a union and should not be misclassified as employees of their clients. There are many low-cost alternatives to the usual employee benefits available to solopreneurs and small business owners, including healthcare costs and retirement programs.
Back when I was president of the Los Angeles Chapter of the Graphic Artists Guild, the national organization was campaigning to unionize — originally under one union, and then it made a second attempt under SAG/AFTRA. Neither effort was successful, mainly due, if I recall correctly, to the number of freelancers who were Guild members who preferred independence over union restrictions. To date, the Graphic Artists Guild remains a trade association, but is not a union or union-affiliated.
That said, I allow that I have some bias regarding Freelancers Union.
In this article, which describes the general benefits of forming an LLC compared to operating as a sole proprietor or incorporating, the author makes the claim:, “However, AB5 includes exemptions for certain types of businesses, including those that operate as an LLC. If you’re a self-employed individual who operates as an LLC, you may be exempt from the provisions of AB5. This can provide additional protection for your business and help you avoid potentially costly changes.”
What did you hear in that? What did you read in that? What’s the author claiming?
The fact is that AB5 does not provide exemptions for LLCs. It’s 3-point test governs the working relationship between the client and the freelancer, not the freelancer’s legal business structure. While there was an increase in LLC formations in 2020 when AB5 was enacted in California, forming an LLC has no bearing on the actuality of how a freelancer performs their work.
The 3 points of AB5 are:
A) The worker is free, both contractually and in practice, from control and direction on how to perform a service; AND
B) The worker’s service is outside the hiring party’s usual services; AND
C) The worker has an independently-established trade, occupation, or business of the same nature as the work performed.
A freelancer must meet all 3 criteria to be classified as independent. Miss on one point. and you are in danger of being misclassifed.
Note that none of those 3 points has anything to do with your legal business structure. So, whether you’re a sole proprietor or you’ve incorporated or formed an LLC, and even if you have employess yourself,
AB5 does exempt certain types of professions. The law was so poorly crafted that it had to be amended and then clarified in a later piece of legislation, AB2257 was drafted and passed in order to fix the problems with AB5.
If the spirit of AB5 becomes part of national labor law whether via legislation (the PRO Act) or through a NLRB rule, it’s not likely that any exemptions will be allowed. Therefore it’s up to the freelancer to make appropriate shifts in how they work with clients to ensure they don’t end up misclassified.
To suggest that forming an LLC may provide protection from AB5 and national labor law scrutiny is harmful if freelancers believe the article. The author and Freelancers Union is doing a disservice to creative freelancers by misrepresenting what the law actually states. While misrepresenting is a common practice these days and people need to do their own research to verify sources and facts, common practice doesn’t determine good ethics.
Toward the end of the article the author states:,”With recent legislation like AB5, it’s more important than ever for self-employed individuals to consider forming an LLC to protect their business and their livelihood.“ Again, this is misleading since it ties AB5 to the protection provided by an LLC.
One can write an article full of accurate information, but if one portion of the article misrepresents the facts, the entire article becomes suspect.
One more thing to note is that the author, Working Today, Inc. promotes Zenbusiness, a service offering easy LLC filings and discounts to FU “members”. By the way, to join FU, subscribe to their mailing list. The organization considers people on its list to be its members. The article is most likely a paid placement on the FU blog to promote ZenBusiness.
Working today, Inc is at minimum a partner with FU or a branch/sub brand of FU. It’s merch includes pro-union and pro-independence gear; https://www.workingtoday.org/merch
You’re probably aware of the havoc and devastation that AB5 created across all industries in California. It’s contributed to the exit of thousands of small businesses, solopreneurs, and organizations from the state to other parts of the US. It’s caused countless freelancers, gig workers, contractors to close their businesses. California has lost a seat in the House because it’s lost population. That’s a very big deal. For sure it’s not AB5 alone that’s caused this mass exodus, but the law has contributed to it. It’s affected freelancers, small businesses, and non-profits.
So, dear freelancer, do not form an LLC because you expect that doing so will protect you from misclassification under AB5 and pending NLRB rulings. Put that aside entirely.
Instead, form an LLC for the right reasons — because of the legal protections, asset protections, and tax benefits.
PS — you may love the idea of organizing freelancers into a union. Working Today, Inc. is on a mission to create policy around workers’ rights and confuse the issue of ICs/freelancers and employees. Its position papers reflect an aversion to true independence and freedom to work when, where, how, and with whom you deem best for you. Is that truly the spirit of freelancing?
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