MBO Partners provides excellent guidance to independent contractors on selecting the right business structure. They write:
The following four structures are discussed with the following assumptions:
- Your business has one owner with no additional shareholders
- You are the provider of professional services and not products
- You do not require investors
- You wish to keep business administration to a minimum
- You do not have need for a Board of Directors
- You wish to minimize legal and tax exposure
Many independents begin their journey as sole proprietors. For tax purposes, you generally operate under your personal Social Security number, but you can apply for a Taxpayer Identification Number (TIN) for your business by filing an IRS SS-4 asking for an Employer Identification Number (EIN) as your TIN instead of using your personal Social Security number.
The business is generally run under your legal name. If you want to give the business an alternate name, you’ll register a Doing Business As (DBA) to state the name you intend to give your business. This process lets your state or local government know the name you are operating your business under. Specific DBA registration rules vary from state to state.
- Sole Proprietors file on a Schedule C (quarterly) but are taxed the same on their personal and business income. Filing only one form each year means less paperwork and hassle.
- Provides flexibility for those still fully employed and freelancing only part-time.
- Does not offer corporate protection of your personal assets. This means there is no legal difference between you and your business assets. If you are sued or go bankrupt, your personal assets are attached to your business and will be available to debtors.
Limited Liability Company (LLC)
Originally designed to protect partners in business, the LLC structure has since become popular for independents due to its simplicity, yet strong legal protections of a corporation shielding your personal assets. Think of it as the next step above a sole proprietorship.
- Simple and inexpensive to set up; requires less paperwork than C and S Corporations.
- For the purposes of taxes, an LLC is not considered a distinct, separate entity, but does offer some protection legally from things like debts and court judgments.
- Seen as a “first structure” that independents seek to have some measure of legal protection.
- If you co-mingle your personal funds and activities with your LLC business activities, you can be exposed to “piercing the corporate veil.”
- You still have an obligation to operate your business as a separate entity to ensure you retain the value of the limited liability of the LLC.
- LLCs are typically subject to self-employment taxes. While you won’t incur corporate taxes as you do with other structures, you’ll account for any profits of the LLC on your personal tax returns. Some states may also charge extra “franchise tax” on LLCs.
Read the full story at Pocket: How to Choose the Right Business Structure for Your Independent Business