Independent Contractor Tax Advisors, a CPA firm focused on helping freelancers and independent contractors, offers its insights into the relative strengths and weaknesses of different business structures for independent contractors. They describe the pros and cons of each type of entity including:
Sole proprietors are common because they’re extremely easy to set up and maintain. It doesn’t cost you anything to set up and there is no separate filing, it only requires you to file a schedule C with your personal tax return.
100% of your income is subject to self employment AND income taxes. Not only that, sole proprietorship leaves you exposed legally. If someone were to sue you for liability, they could take you for everything you have.
An LLC is still simple to open and maintain as most states only require an annual LLC filing and fee to keep the LLC open, but the LLC does not file a separate tax return. It also establishes what is called the corporate veil, which separates your personal finances from your business entity. So if someone were to sue you for liability, the most you could lose is your company as long as all compliance standards were followed.
As a single-member LLC, you are taxed as a sole proprietor, so 100% of your income is subject to self employment and incometaxes. This can potentially cost you thousands in extra taxes.. Now, to open an LLC, you will have to pay an initial fee, and there might be an annual fee required by your state to keep it open as well.
Read the full story at Pros and Cons of Sole-Prop, LLC, C Corp and S Corp | Independent Contractor Tax Advisors