This is a guide to the best business structure for freelancers. I will compare two of the best business structure for freelancers: corporations and LLCs in this guide.
As soon as you start working as a freelancer, there are a lot of important tasks that should be put into place because when it comes to freelancing and running your own business, often this entails much more than just freedom and successful work.
Freelancing is also seen as being self-employed or to be running your own company so certain aspects must be in place to ensure that you both organize your business the right way and provide high-quality work at all times.
In this comprehensive guide, I will compare the two of the best business structure for freelancers: Corporation and LLC. If you are a freelancer, this guide will help you to choose the best business structure.
Best Business Structure for Freelancers in 2022
What is a Business Structure?
If you’re a freelancer selling your services on the internet, you need to set up a business structure.
Your business structure is the legal structure that your business falls under. As a freelancer, you’re responsible for making all the important decisions in your business.
There are many types of business structures, and they all have their pros and cons. It’s not to say that choosing one business structure over another is easy.
In fact, the choice can be downright confusing! That’s why we’re going to break down the two common business structures to help you determine which one is right for you:
- A Limited Liability Company
- A Corporation
Limited Liability Company (LLC)
The Limited Liability Company, or LLC, is a business structure that combines the best features of a corporation and a partnership.
The LLC is a hybrid business form that provides the limited liability of a corporation and the tax efficiencies and operational flexibility of a partnership.
The LLC has become one of the most popular forms of business structure in the United States. It’s particularly popular among small businesses because it combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation.
Related: How to Form an LLC for Free
A corporation is a business structure, created under state law, that’s separate from its owners. The owners are called shareholders, who are issued shares of stock that represent their ownership in the company.
Just like with LLCs and partnerships, corporations have their tax ID number and are required to report profits and losses on their tax return.
A corporation can also offer more limited liability protection than an LLC. Only shareholders can be sued for liability relating to the business operations of the company.
There are two types of a corporation:
- C Corp
- S Corp
C corporation is a legal entity separate from its owners. C corporations are formed under state law or in some cases the laws of U.S. territories, such as Puerto Rico. The corporation files its tax return and pays taxes on its net profits.
The shareholders report their pro-rata shares of the corporation’s income or loss on their tax returns, like how partnerships and LLCs are treated by their owners. C corporations are recognized as legal persons under federal and state law.
S corporations are a type of corporation that has the benefit of limited liability but can also be taxed like an LLC or partnership. The shareholders of an S corporation are called “shareholders” and not “stockholders”.
This is because the corporation does not issue stock, nor are shares distributed to shareholders. Rather shareholders are allocated a share of the corporation’s profits, losses, gains, deductions, credits, and/or other tax attributes.
Conclusion (Which is the best business structure for Freelancers)
There are many factors to weigh when deciding on the best business structure for freelancers.
A Corporation offers a lot of benefits: liability protection, continuity of business if a key person leaves, and the ability to raise capital easily. But an LLC is better than a Corporation for a freelancer because LLC is inexpensive to set up and easy to operate and manage.