As a freelancer, there are four business models from which you can choose. I highly recommend you speak to an attorney and an accountant before choosing any option because they will be able to guide you to the model that is the right option for you and your circumstances. Three of the options have forms to file with your state, and from an accounting standpoint, you will want to be sure you are paying your estimated taxes on time throughout the year. If you are “off” on your tax estimate or miss a tax filing date, there are penalties, and honestly, you want to avoid those penalties, so talk to an accountant or tax attorney.
What are the four business model options?
The first business model option is as a “sole proprietor” – you. You can remain as you are and not be a “business.” In most instances, you still file your business expenses on a Schedule C and pay self-employment taxes on the individual tax return. BUT, this option does not afford you much protection nor does it give you the foundation on which to grow a business. Why? Because it does not separate your business from you. In other words, if you were to file bankruptcy or get sued, they could go after your personal assets as well as the business assets.
The second business model option and the most used one for small businesses is the Limited Liability Company, otherwise known as an LLC. An LLC is not a corporation, but a company. It is by far the easiest business option to set up.
Most states do not require a lot of documentation to initialize or to maintain a company. Please be sure to have an attorney do a name search to ensure your business name is not already in use. Once you have verified that the name is available, refer to your state’s specific rules and regulations, as well as state specific forms for creating the LLC. In many cases, you file a single form, pay a fee, and lock in your business name so no one else can use it in your state. Once you do that, you register with the IRS to obtain a Federal ID Number (FIN) for your LLC. This number helps to establish the business as a separate entity from you. This protects you and your personal assets in case the business is sued or goes bankrupt because they can only go after your business assets.
As an LLC, you are what is called “sole proprietor” – which simply means that, like an individual, you will use Schedule C on your federal tax return to show your net revenue minus allowable expenses. What is left over is considered “profit” and is subject to self-employment tax.
As a business owner/sole proprietor, you are paying all state, federal and local taxes, and rather than a portion of FICA taxes as you would working for an employer, you are now paying the full FICA amount.
From a tax perspective, there really is not much benefit of being an LLC versus filing under your Social Security number as you would in the first option. The real benefit is the protection of your personal assets from the business as well as establishing a strong foundation while expending as little money and effort as you determine your business’ future.
Part 5 will discuss business model options 3 and 4.