Choosing a Business Entity as a Freelancer

Hello there, friend. Before you read any further, we’d like to warn you that this blog is a bit of a doozy. It’s about choosing a business entity as a freelancer.

Wait! Come back! Just hear us out.

Choosing an official business entity can be tricky, complicated, and downright frightening. There’s a lot to consider, but it’s absolutely worth taking the time to weigh all of your options to make the best decision for you.

Just because you’re starting out small doesn’t mean you’ll be small forever. Trust yourself, trust your skills, and get help whenever you need it. And never forget, IDLance is only a click away!

OK, let’s dive into the six different types of business entities and what the heck they mean.

1. Sole Proprietorship

Sole proprietorship, or “sole PP” as the cool kids call it, means you own the business entirely by yourself! You control the business and the decisions are yours alone. You don’t need to get approval from partners, members, officers, directors, or shareholders. You are all powerful!

Technically, it’s an unincorporated business which means there’s no pesky U.S. government all up in your business—literally. No one is going to tell you how to set up your business structure under a sole PP (we’re cool kids btw).

That makes this business entity incredibly easy to create and just as easy to end. This is handy, especially when you are a freelancer who is just starting out.

As a freelance contractor under a sole proprietorship, you can use your social security number if you need to fill out an IRS W-4 (which would get you a 1099-MISC income form at the end of the year) or IRS W-9 form (for your W-2). Pretty straightforward, right?

However, being a sole proprietor means you have “unlimited liability.” This means that if you borrow money or use a credit card to fund part of your business, you’re personally responsible for all the debt 'n’ stuff that you accumulate over time. So, keep that in mind and try not to carry any debt that you won’t be able to pay back if you don’t earn a profit.

2. General Partnership

General partnerships are basically the same as sole proprietorships, without the “sole” part. It’s two or more people getting together to start a business with not much paperwork stuff involved.

A general partnership means you and your partner(s) co-own a freelance biz and agree to share in all the good stuff like assets and profits, but also the not-so-fun stuff such as financial and legal liabilities.

In the absolute worst scenario, any partner could be sued for all of the general partnership’s business debts. If you can’t pay up, the debts or lawsuits can be paid off through the seizure of you or your partner’s personal assets (house, car, yacht, dead butterfly collection, etc.).

This business entity is cheap and relatively easy to set up, but keep in mind that everyone involved in the GP will be taxed individually. This is really both a pro and a con. It’s a con because generally business taxes have lower rates than individual taxes. Because the taxes are passed through to you and your partner(s), you might collectively pay more than if you paid business taxes.

3. “Doing Business As”

We’re just gonna say it—this one has a weird name. “Doing business as,” or DBA for short, is a silly little business entity that we’re not going to spend too much time on.

If you’re starting a sole proprietorship or a general partnership, you can use a business name or a DBA name.

It’s easy, it’s cheap, and it keeps your personal name out of the public eye and off documents and such. Being able to use a “real” business name can help clients take you more seriously and helps you build a recognizable brand. But keep this in mind, it does expire. You’ll have to renew your business name regularly as required by your county, city, or state.

4. Limited Liability Company

Limited Liability Companies, or LLC’s, are corporate business entities where the owners are not personally responsible for the company’s debts or liabilities. What a relief!

The catch is that rules and regulations in place for LLCs can vary from state to state. So do some research on your own state before jumping into one.

What’s cool though is that any type of business, individual, or corporation (except for banks and insurance companies) can form an LLC. The LLC itself doesn’t pay taxes. Each member’s share of the business’s profits and losses are passed through to their personal tax returns. Nice and simple!

This business entity is sort of the next level up from sole proprietorship. It’s not free, there’s a bit of filing to do, and you gotta keep your personal dollars from your business dollars. Overall, though, it’s cheaper and much less complicated than other corporation types. It also offers more protection than a sole proprietorship or general partnership.

5. S Corporation

S Corp is a nickname for S Corporation. It’s a variation of a corporation within “Subchapter S” of Chapter 1 of the Internal Revenue Code (IRC). Yeah…pretty much sounds like crazy spy talk, eh?

Basically, an S Corp is any business that chooses to pass the business’s income, losses, deductions, and credit through shareholders for federal tax purposes. It also has the benefit of limited liability and relief from “double taxation” that comes with C Corps.

S Corps are the real deal. There are special benefits to being an S Corp, but also special rules that quite frankly, are too expansive to get into in this lil’ ole blog.

6. C Corporation

C Corporations are business entities where the owners are taxed separately from the entity. The “C” stands for the law that explains the double taxation required in this type of entity, which is in subchapter C of the Internal Revenue Code.

A C Corp is required to hold at least one meeting each year (for you, your shareholders, and directors). You have to take minutes of the annual meeting and share them with everyone.

You’ve got to keep records of any voting that happens and you also need to keep a list of the company’s directors, owner’s names, and ownership percentages. They must file annual reports, financial statements, and disclosure reports. Doesn’t that sound fun?!

A pro? Your assets (house, bank account, hovercraft, backyard rollercoaster, etc.) are protected. Same for the other shareholders in the C Corp. Business debt stays with the business.

Cons? There are more regulations and formalities. They have more government “oversight” than other business entities (and more complex tax rules, too). Plus, you can’t deduct corporate losses on your personal tax returns (unlike an S Corp where you can).

Conclusion

Holy cow. That was a lot. Don’t be afraid to ask questions, use Google, or consult a professional as you’re figuring out which business entity to choose. You are only one person!

We know you’re a multi-talented superstar, but be kind to yourself. There’s no way anyone can be an expert at EVERYTHING right away.

Even frustratingly wonderful, endearing, and successful people (lookin’ at you, Jeff Goldblum) get help from professionals!