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Pros and Cons of Freelance Sole Proprietorship

A Freelance Sole Proprietorship is the technical classification for an independent professional. Perhaps because many freelancers engage in creative work and/or “gig” work, many do not think about their operations as “business,” strictly speaking, but by default, freelancers are legally considered sole proprietors.  This means that any freelancer who engages in business-related behaviors is considered a sole proprietor unless steps are taken to have his or her operations recognized in a different way under the law. There are numerous benefits to operating as a freelance sole proprietorship, but it is important to avoid doing so by default. By learning about what it means to operate as a sole proprietorship and about other options available to you, you can make an informed decision about what structural model will best serve your goals and your freelancing business as a whole.

 

Operating as a Sole Proprietor

Operating as a sole proprietor allows for flexible management structure, personal liability risk and tax structure. Unlike corporations beholden to shareholders, the owners of sole proprietorships are responsible only to their own goals for the business. In addition, because sole proprietors do not need to formally incorporate if they do not choose to, there is much less legal paperwork involved in operating a business in this way than there is when a business functions as a limited liability company or corporation.

The major drawback to operating as a sole proprietorship is that this legal structure does not offer the owner/operator a shield from company-related liability. Sole proprietors are not treated as legally distinct from their businesses. This means that if the business is sued, incurs losses or debts or is held accountable for company-related wrongdoing that the freelancer’s personal assets may be seized in order to account for these circumstances.  As such, a freelance sole proprietorship offers little protection.

In addition, business expenses, assets and losses are accounted for on the freelancer’s personal tax return. Not every freelancer wants to keep his or her personal taxes and business taxes so intimately interwoven. With that said, it is worth noting that as a sole proprietor, you may generally deduct business expenses from your personal tax liability. This can be a beneficial arrangement for some freelancers. If you have questions about whether this structure is right for you and your business, please consider speaking with an attorney and financial planner.

 

Freelance Sole Proprietorship to LLC

Converting your sole proprietorship to LLC can give you the flexibility of operating individually with less liability. A Limited Liability Company can be operated as a solo individual or by many individuals. The primary benefit of incorporating as an LLC is that this business structure will largely insulate your personal assets from liability in the event that your business loses money, incurs debt, is sued or is held liable for business-related wrongdoing.

If you choose to incorporate as an LLC, you may opt to either be taxed as a sole proprietorship or as a corporation. If you do not actively choose to have your single-member LLC taxed as a corporation, it will be taxed as a sole proprietorship by default. If you choose to have your operations taxed as a C-corporation, they will be taxed at the corporate level. Practically speaking, this will mean that your business taxes will be truly distinct from your personal return.

 

Affordable Legal Assistance for Freelancers

If you are a freelancer and have questions about the legal side of your business, LawTrades offers affordable legal assistance for freelancers. We have extensive experience aiding freelancers in the processes of formally incorporating their businesses, remaining compliant with business-based regulation and protecting their intellectual property.

Since we’re a network of lawyers instead of a big, corporate firm, we’re often more affordable, effective and efficient; this tends to be attractive to freelancers who are focused on ensuring that the legal aspects of their operations are taken care of quickly and with minimal fuss. We are passionate about helping businesses succeed, so please think about contacting LawTrades today for all your legal needs.

 

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