What’s the Best Legal Structure for Your Freelance Business? (2024)

FAQs

What’s the Best Legal Structure for Your Freelance Business? ›

A sole proprietorship is easy and cheap to form and run, so it's a fantastic choice when you're first getting up and running. Plus, you can always go back and form an LLC or corporation later, once your business becomes more established and you're earning more.

If you form an LLC without electing S Corp taxation, you stand to pay more in taxes, because you'll be taxed as a sole proprietorship by default. Electing S Corp taxation for your LLC could save you a lot of money in taxes each year.

An LLC lets you take advantage of the benefits of both the corporation and partnership business structures. LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits.

An LLC is a great choice because it's relatively easy to form, protects your personal assets, and is flexible in its management and tax options.

Sole Proprietorship

Plus, you can always go back and form an LLC or corporation later, once your business becomes more established and you're earning more. Fun fact: the vast majority of freelancers (over 80%) are sole proprietors. Many people will even continue working as sole proprietors their entire lives.

Remember: you don't have to form an LLC to freelance. Sometimes sole proprietorships and partnerships work well without being turned into LLCs.

S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount.

If the LLC is a corporation, normal corporate tax rules will apply to the LLC and it should file a Form 1120, U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 or 1040-SR from a C corporation return.

The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A limited liability company (LLC) is a business structure allowed by state statute.

Is it better to be 1099 or LLC? ›

Is it better to be a 1099 or LLC? That will depend on your situation, but many entrepreneurs prefer LLCs because of the personal liability protection and tax flexibility they provide over being an unregistered independent contractor.

Answer: Independent contractors generally report their income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Also file Schedule SE (Form 1040), Self-Employment Tax if your net earnings from self-employment are $400 or more.

An LLC is a good choice for independent contractors wanting liability protection and to avoid double taxation. Create an LLC yourself in minutes, or seek legal advice from a local business attorney to find the best structure for your business.

Generally, a Sole Proprietor does not need an EIN. But sole proprietors can also get an EIN if they choose to do so. However, if you work 1099 for a long time, it is recommended that you apply for an EIN to separate your tax reporting.

The primary benefit of turning your side hustle into an LLC is personal asset protection. If something were to go horribly wrong while pursuing what you thought was a weekend passion that brought in a few extra dollars, your personal assets could be at risk.

To file your annual income tax return, you will need to use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report any income or loss from a business you operated or profession you practiced as a sole proprietor, or gig work performed.

S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary.

Choosing an S-corp will help you save on your self-employment taxes, just be aware that this will require intense and precise bookkeeping. LLCs are best suited for smaller businesses because of their flexibility, cost and convenience. LLCs require far less paperwork to both create and maintain than an S-corp.

The choice of creating an LLC or an S-Corp generally depends on both the state and what the independent contractor wants to accomplish. The LLC grants limited liability with personal assets in lawsuits, but it may not give any other advantages if the state assesses a greater tax percentage.

A lot of freelancers, gig workers, and independent contractors are LLC-curious. First things first: You don't actually need an LLC to freelance or deduct business expenses. And having one won't automatically lower your tax bill. The reality is, an LLC will only save you money if you earn a lot on 1099.