What Every Freelancer and Blogger Should Know About Their Business Structure
If you’re like most freelancers, you started your business as a sole proprietorship. Actually, if you’re like most freelancers, you just started finding gigs and didn’t consider your business structure at the beginning. Now and then you might wonder if you should incorporate, but it’s an easy issue to procrastinate ⎯ after all, meeting that deadline is a more pressing issue.
If you’re a freelancer, you’re a business owner. And there are a few things you’ve got to keep in mind in order to make your business official. Getting your legal ducks in a row will help you avoid legal pitfalls in the coming years, and yes, may even help you save money on taxes.
- Liability/personal asset protection: Without incorporation, your own personal savings and property are at risk to settle any debts of your business. Once your business is a corporation or LLC, it becomes a separate legal entity. This means that the corporation (and not you) is responsible for all of its debts and liabilities. I know, you don’t anticipate angering clients or defaulting on any payments. And most likely, you’ll never encounter this kind of trouble. But things do happen. And a legal business structure gives you peace of mind that your retirement savings won’t be wiped out by your business venture. But what if you’re just starting out and don’t have much in terms of savings or assets yet? You still should worry about asset protection, as creditor judgments can actually last a total of 22 years (11 years plus 11 years). So think down the road when your business is a huge success. I don’t need to tell you that Mark Zuckerberg’s personal holdings have changed dramatically over the past 11 years. Forming an LLC or corporation can protect the assets you have in the future, not just what you own today.
- Tax benefits: While liability protection is the main benefit for incorporating or forming an LLC, in many cases, corporate tax rates are lower than individual tax rates. And corporations and LLCs often qualify for additional tax benefits and deductions that aren’t available to individuals. Of course, specific circumstances vary, and you should consult with a CPA or tax advisor about your own particular tax situation.
Which business structure is right for me?
A self-employed person or small business will typically choose between two business structures: LLC and S Corporation:
- Limited Liability Company (LLC). In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a corporation. An LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates. The LLC is great for entrepreneurs that want liability protection, but minimal formality (no exhaustive meeting minutes or paperwork). It’s also the perfect structure for a business with foreign owners since anyone can be an owner of an LLC.
- S Corporation. An S Corporation is great for a small business owner who can qualify: The IRS places limits both on the number of owners and on who can be an owner in an S Corporation. All owners are taxed based on their percentage of ownership.
Take some time to explore the two business structures and see what’s right for you. I know that in the flurry of supporting your current clients or drumming up new business, it’s all too easy to put off some of the legal aspects of your business. But make some time in your busy schedule for some of the legal fine print. Your business is worth it.