As a freelancer, the bulk of your focus will land on your creative and aspirational pursuits—at least during the beginning stages. However, you’ll also need to figure out the best way to run the administrative side of your business to sidestep fees and scale your efforts.
After you decide on your business model, establish a work-life balance, and gather all the necessary tools for solopreneurs, you’ll need to figure out which business entity option makes the most sense for your career. Read on for a comprehensive guide on identifying the proper entity.
When it comes to freelancing, most business owners are sole proprietors. That means a single individual owns and operates the business or workload. Ultimately, unless you form an LLC or corporation, you’re considered a sole proprietor.
A sole proprietorship is a least expensive and most straightforward way to start a business due to its low tax burden, so it’s common among freelancers. In addition, you’ll declare all income on your individual Form 1040 just as you would under standard employment.
If a business has multiple owners, it’s automatically classified as a partnership. Partnership entities are similar to sole proprietorships in function, except you split all assets between members instead of a single person. Plus, they’re simple to form, with all losses divided between associates.
An LLC is a limited liability company that falls squarely between a sole proprietorship and a corporation. LLCs function similarly to sole proprietors in terms of taxes and flexibility.
However, unlike a sole proprietorship, you can form a multi-owner LLC. In addition, an LLC is a legal entity separate from you. So, you’ll be able to own property, open bank accounts, and hire staff under your LLC name.
Similar to an LLC, C Corporations are legal entities separate from their owners, acting as the default business entity when starting a corporation. Those who opt for a C Corporation incur all business debts, file individual taxes, and pay federal income tax. It’s an ideal option if you currently bring in significant profits or have multiple shareholders. Plus, for those hoping to advance to an S Corporation entity, switching your identification is a straightforward task.
An S Corporation isn’t a business entity so much as a tax designation allowed for LLCs and certain corporations. All taxes, losses, income, and credits are paid by or passed to the shareholders for those with S Corporation status. Plus, these specific entities are exempt from federal income tax, and shareholders don’t hold personal liability for debts.
However, as an S Corporation, you’ll operate under the same rules and regulations other corporations would so study up before swapping over.
There’s a lot to consider when choosing the correct business entity for your freelancing pursuits. Before you jump into an ill-fitting agreement for your operations, take an honest inventory of your business and try to align with the most beneficial entity. That way, you can breeze through tax season with ease.
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