You’ve made the decision to step away from your 9-5 to pursue freelancing. You took the time to create an aesthetically pleasing portfolio and website to showcase your work. Fortunately for you, a past colleague has presented you with an opportunity to subcontract on a major project they have just been awarded. You quickly accept and are later asked to provide the necessary paperwork to solidify your new role as a subcontractor. As you begin to leap for joy, you suddenly realize that you never legally set up your business.

So, what now?

While it’s easy to get ahead of yourself when beginning your entrepreneurial journey, it’s important that proper planning first takes place to achieve success in the freelance world.

This article presents four business models to choose from to maximize your chances of longevity as a new business owner.

Which Business Model is Right for You?

Darwin’s survival of the fittest theory states that only those most capable of adjusting to their environment are most successful in surviving difficult times. Likewise, being a business owner is no different. While you may have all of the hard skills necessary to survive as a freelancer, do you have the best business model to meet your financial goals?

Let’s take a look at four business models from which you can choose as well as pros and cons of each.

Model #1: Sole Proprietorship

The first business model we will discuss is sole proprietorship, also known as “sole proprietor”. With this option, there is no legal distinction between yourself and your business. In most instances, you still file your business expenses on a Schedule C and pay self-employment taxes on the individual tax return.

This option does not afford you much protection nor does it give you the foundation on which to grow a business. In other words, if you were to file bankruptcy or get sued, someone could go after your personal and business assets. Therefore, it’s important to weigh both pros and cons to determine if this is the best option for you.

Model #2: Limited Liability Company (LLC)

The second business model option and most used for small businesses is the Limited Liability Company, otherwise known as an LLC. An LLC is not a corporation, but a company and an easy 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.

Once you have chosen a name and verified it is not in use, register your business name 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 and protects both you and your personal assets.

As an LLC, you are what is called a “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.

Model #3: S-Corp

The third business model option is an S-Corp, which is a corporation much stronger than an LLC. To learn what is required to set up and maintain an S-Corp, be sure to find out your state’s rules and regulations. In most instances, more paperwork is required than for an LLC, but less than is required for a C-Corp (the fourth business model option which will be discussed later).

The benefit of an S-Corp status is you can pay yourself a salary as if you are an employee of the business (meaning you must actively participate in the day-to-day activity of the S-Corp). However, this can be time consuming and if you are spending too much time creating invoices, managing payroll, taxes, etc., you may consider hiring a payroll company.

As an S-Corp, you need to be able to estimate the year-end profit, so you are also able to estimate your quarterly taxes throughout the year. This is really hard to determine when first starting out and why so many choose to go the LLC route. In an S-Corp, the year-end profit (revenue minus expenses) is not subject to self-employment tax, such as that found in options 1 & 2.

Model #4: C-Corp

The fourth and last business model option we will discuss is the C-Corp. As either a sole proprietor or in partner with others, a C-Corp is probably not the easiest option to begin with. The C-Corp requires significant investment in paperwork and adherence to regulations at both the federal and state level.

The downside to the C-Corp, especially a small one, is that the profits are taxed at the corporate rate. So, like in an S-Corp, you pay yourself a salary that you must pay taxes on, but you alsomust pay corporate rate taxes on any profit. An accountant or tax attorney can guide you through what types of losses are deductible against various types of income.

Many people start as an LLC to test the waters as to whether they want to be in business for themselves. If after several years you see your business consistently growing revenue and you truly love owning your business, then you can always file certain forms with the IRS to elect to be taxed as an S-Corp.

Wrapping Up

While there are various business model options from which you can choose as a freelancer, you must determine which is best for you in terms of limiting your personal liability, protecting your personal assets, and envisioning the future of your company.

The nuances of starting a business can be overwhelming, making it easy to miss important details; therefore, it’s highly recommended you speak to an attorney and an accountant before choosing any option to better guide you to the model that is best for your circumstances.

While starting out on your business journey may seem like a daunting feat, remember to take it one step at a time and utilize professional resources.