Upwork’s latest survey found that 60 million people in the country perform freelance work and represent 39% of the entire US workforce, according to Business Wire. Freelancing provides people with freedom to work from anywhere, set their desired rates, and determine their work hours. However, when freelancing, many individuals dedicate time and effort to deliver high-quality services and overlook the administrative part of their work.
It’s important to understand that organizing and managing your freelance business legally also goes a long way to ensure that you deliver great services. With this understanding, it’s crucial to choose a legal structure when starting your freelancing business. Read on to learn more about various business entities for freelancers and which option is right for you.
Sole Proprietorship
For aspiring freelancers, sole proprietorship is the go-to option because it’s easy to form and manage. Not to mention, you can always register as an LLC or corporation later once your venture is stable and you’re earning more money. The advantages of sole proprietorship range from easy tax filing to affordability. Moreover, you don’t need permission from the government or pay any fees to run your freelancing gig.
Keep in mind though that local authorities will require you to file for a fictitious name if you choose a different name other than your official name. The downside of sole proprietorship is that your business and personal assets are not separate. If clients sue your freelance venture, you might lose your personal assets.
Corporation
This is the most complex and expensive business structure to consider. However, there are many benefits freelancers enjoy by forming a corporation, including limited liability. In simple terms, you’re not personally liable for business debts and lawsuits.
Since corporations provide stock offerings, incorporating your business as a corporation is an excellent way to attract investors and employees. Not to mention, transferability of ownership is easy and there are two options for filing taxes. You can choose to file business taxes as an S corp or C corp. If you choose to form a C corp, you’ll be required to file your income taxes with the IRS and pay federal income taxes at a flat rate of 21%.
As a C corp, you don’t enjoy tax deductions, so it isn’t the perfect structure for a freelancing gig that expects low profits in the first few years. S corps are an ideal choice for freelancers because it reduces the amount of Medicare and social security taxes you pay. In most cases, S corps don’t pay taxes but must file returns with the IRS.
Limited Liability Company
Like with corporations, an LLC protects you from company debts and lawsuits and boosts your credibility. LLCs also benefit from pass-through taxation, meaning any income or loss your freelancing business incurs is passed through to your income tax and filed in personal returns. Forming a limited liability company is straightforward if you follow the right steps. As a general rule, decide where you’ll set up your freelancing business.
In most cases, freelancers form LLCs in the state they live in. But if you wish to form an LLC outside your state, Delaware is the best choice. You’ll have to register as a foreign company, which could increase incorporation and administrative costs. Note that the cost and requirements of starting an LLC vary from state to state. To start an LLC in Georgia, for instance, you need to choose a unique name and register with the Georgia Secretary of State. Next, designate a Registered Agent or recipient of legal mail in the event clients sue your business. You can register yourself as the Registered Agent for your business, assign a friend or relative, or hire Registered Agent services within Georgia.
Once you’ve picked your Registered Agent, file an article of organization, LLC operating agreement, and federal tax ID. Like with other states, you need to obtain the right business permits, file your taxes on time, and file an annual report, which costs $50 per year in Georgia. The downside of an LLC is that it costs more than a sole proprietorship and partnership, and transfer of ownership is complex compared to corporations.
Partnership
The most notable advantage of a partnership is that it’s easy to form because you don’t need to fill in government paperwork, unless you want to register your freelancing gig under a fictitious name or get a business license. For taxation, a partnership must file a Schedule E and annual tax form with the internal revenue services (IRS) to show your income taxes, profits, losses, and deductions.
Because a partnership is like sole proprietorship, partners in a freelancing business must pay social security and Medicare taxes, and income tax. The major drawback with starting a partnership for a freelance business is that members or partners are liable for the partnership’s lawsuits and debts, like in sole proprietorship.
Whether you’re starting a freelance writing or website development company, a legal entity protects you from financial and legal liabilities. You also enjoy tax benefits and boost your credibility in the freelancing gig market. However, to enjoy these benefits, familiarize yourself with different legal business entities available for freelancers. Depending on your legal needs, business goals, and budget, you can form sole proprietorship, a limited liability company (LLC), partnership, or corporation.
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