Choosing a business structure

You’re not dabbling with a hobby, you need a legit business structure.

Business Structure

If you’ve been dabbling with freelance work, you may have gotten started doing business as yourself.  Often freelancers start as a sole proprietor and then move into structuring their venture as an LLC or limited liability company.  

We’re going to go over several different options for structuring your freelance business:

  • Sole proprietorship
  • Incorporation
  • Partnerships
  • LLC or Limited Liability Company

Sole Proprietorship

A sole proprietorship is one of the most common forms of business ownership.  If you plan to run your freelance business on your own, this model is the most simple.  It’s easy to start up, has limited paperwork to file, and is subject to fewer regulations.

If you plan to do business using your own name, you’re set.  If you’re interested in operating under another name, you’ll need to file a trade name (a DBA or “doing business as”) with your state.

One disadvantage to a sole proprietorship is that there is no legal separation between you & your business.  This is especially important to know when it comes to assets because you’ll personally be liable for all debts if your business doesn’t work out.  It also means you’ll be personally responsible for any damages that your business may cause.

For tax purposes, a sole proprietor pays self-employment taxes on their profits, which means you’ll report your business income by filing Form 1040 with Schedule C.  If you start out as a sole proprietor but feel like you’re experiencing a lot of growth, it’s relatively easy to switch your business structure to a corporation or an LLC.

Partnership

Sometimes over coffee, two friends can come up with an idea for a small business.  A partnership is when two or more people put in money, labor, or other contributions with the intention of sharing the profit & loss from the business.  

A limited partnership has limited partners whose liability & input are based on their level of investment in the business.  There is significantly more paperwork required for this type of business – in addition to licenses and permits, partnerships must be registered with the state and have a legal business name.   

The good thing about a partnership is that sometimes two heads are better than one with getting initial financing and sharing the workload.  The potential downside to this type of business is that you’ll want to make sure you’re going into business with someone who shares your same work ethic.  That’s why it’s important to identify in writing who will do what tasks in the business and how you’ll divide your profits, how you’ll make decisions in the business.  

Incorporation

A corporation is a separate entity that pays taxes and distributes profits to its shareholder owners as dividends, salaries, or bonuses.  

There are two types: C Corporation & S Corporation

You would need to register your corporation by its business name with your state and also file articles of incorporation with your state’s Secretary of State office.  Each state has specific requirements, so you’ll need to do careful research.  

If you anticipate your freelance business needing investors, structuring your business as a corporation can be a good choice.  To better understand if this business structure is right for you, I highly suggest speaking with an accountant.  

LLC (Limited Liability Company)

An LLC is like a corporation & a sole proprietorship got married and had a baby – it has the liability protections of a corporation and the tax advantages of a partnership.  

If you have more than one partner, you have an LLP.  As a freelancer, you might consider becoming a single owner LLC.  To get this status, you must file paperwork with your state.  LLCs don’t need to register a business name and depending on your state you may need to have an operating agreement.  

For tax purposes, LLCs avoid the additional filing fees and double taxation issues of corporations.  The profits and losses are simply past on to the members (you) who then report those profits & losses on their taxes.  

Why it matters...

Whether you’re launching a freelance photography business or developing a marketing agency, choosing a business structure will be so important to your success.  If you want to be legit, take the time to set things up correctly in the beginning.