A Quick and Dirty Introduction Into Four Types of Freelance Business Entities
The pros and cons of the four main types of business entities for freelancers: Sole Proprietorship, Limited Liability Corporation (LLC), S Corporation, and Doing Business As (DBA)
This article was written by featured writer Ashlee Christian
Many of us toe dip into the freelance waters innocently enough. A freelance contract here, a few side gigs there, and before you know it you’ve quit your full time job and have to figure out how to dobusiness on your own. When considering the different types of entities that are out there, it’s important to weigh the pros and cons to figure out what’s best for you and your business. For freelancers, there are four types of entities to consider: Sole Proprietorship, LLC, S Corporation, and DBA.
Sole Proprietorship:
This is by far the most common type of business entity in the US due in part to how easy it is to set up, as well as how low the tax rate is when compared to other pass through entities.
- Pros:
- There is no need to formally register your business in your state.
- There are no regulations about having a board of directors or meetings.
- You enjoy all of the profits.
- Cons:
- The flip side of enjoying all the profits is of course being responsible for any losses.
- You are also responsible for any personal liability and for any negligence.
- If something happens to you, or if you cannot continue to work, your business ceases to exist.
- What you need to get started:
- A business name, website, and location for your business
- A business checking account
- Even though you don’t need to register with the state you will need to file for a business license with your locality.
LLC:
LLC stands for Limited Liability Company and it’s the easiest way to structure your business to protect your personal assets against litigation.
- Pros:
- Your business income is filed as part of your personal income and not taxed separately.
- If your LLC only has one member it’s taxed the same way as a Sole Proprietorship.
- You are not required to have a board of directors or meetings.
- The initial paperwork and fees are pretty reasonable (depending on the state you register in).
- Cons:
- If you are a single member LLC you cannot pay yourself a salary.
- Some states, including California, New York, and Texas require LLCs to pay a franchise tax known as “Capital Values Tax”.
- What you need to get started:
- A state to register in.
- A unique name.
- Articles of organization (the document you file when you register your organization which includes your business name, purpose of your business, name and address of your registered agent.)
S Corporation:
An S Corp is not a business entity as much as it is a designation for how you choose to have your business taxed under the IRS code. This designation is best for folks whose business collects profit beyond what they pay themselves as a reasonable salary.
- Pros:
- Protects you from business liabilities as an LLC does.
- Keeps you from paying both personal and business taxes
- Allows you to pay yourself a salary and receive dividends from any additional profit your business makes
- Cons:
- You must file business returns in addition to your personal income returns.
- Unlike LLCs you must be a legal US Resident in order to register one.
- There is a lot more paperwork/fees involved and can be subject to more IRS scrutiny.
- What you need to get started:
- An S Corp is basically just a tax filing designation that you can choose to file under if you meet certain requirements once you’ve already filed an LLC.
DBA:
DBA stands for Doing Business As, and it isn’t so much a passthrough as it is a way to give your business a name other than your own.
There aren’t a whole lot of cons or things you need other than a name and money for the fees. However, DBAs can add more “legitimacy” to your business and in many cases banks will not allow you to open a business account without one. Also when the time comes to make things more official, it’s relatively easy to convert your DBA into an LLC.
There is obviously huge amounts of information about these different entities available, and ultimately, it’s important that you consult with your accountant or another professional before deciding what to pursue. If you don’t have an accountant/business sherpa, companies like LegalZoom or Incorporate.com make the process of registering one of these entities quick and painless!
