When freelancers conduct business without formally registering that activity with the state, their businesses are generally treated as either sole proprietorships or partnerships by default. This essentially means that freelancing activities remain subject to taxation, even if they have not been incorporated. But it is important to understand that although the state has a default mechanism for taxing single-member (sole proprietorships) and multi-member (partnerships) freelancing businesses, it remains critically important for freelancers to formally register their activities.
Registration generally entails choosing a legal business structure, selecting a taxation model and formally incorporating. Why is this important? In general, unless a company has incorporated (or obtained a foreign qualification) in the state in which it is conducting business, that business is not being conducted legally. As a result, freelancers remain vulnerable to various penalties and liabilities until their companies are formally recognized. In addition, formal recognition grants businesses a number of protections and benefits under the law.
When choosing a business structure, freelancers generally have four primary models to choose from. Formal sole proprietorships and partnerships work well for many freelancing businesses. Similarly, limited liability company structures are becoming increasingly popular with both single-member and multi-member freelancing operations. The final business structure available to business owners is a corporate structure. However, the very nature of freelancing involves working for multiple employers at one time rather than being tied to a single business entity, so a corporate structure may prove antithetical to the freelancing model.
Legal Business Structures for Freelancers
Formal sole proprietorships and partnerships allow freelancers the greatest freedom to operate their businesses with a flexible management style. Although some partnership structures are more limited than others, these two options work well for freelancers who do not want to be tied down by a strict management structure. However, the major drawback to forming sole proprietorships and partnerships is that neither structure allows freelance company owners a personal liability shield.
If you are concerned about safeguarding your personal assets from business-related creditors and legal judgments, you may wish to consider forming a limited liability company. This option is available to both single-member freelance company owners and multi-member freelance company owners. Although the management style associated with this structure is a bit more rigid and running this type of business requires more paperwork than sole proprietorships and partnerships do, the personal liability shield essential to the structure makes this an attractive option.
The primary reason why a corporate structure does not suit the freelancing model is that it requires a very strict management style and remains beholden to stockholders. Freelancers do not generally wish to have their operations owned by others and subject to the direction of a board of directors.
Thinking About Taxes
It is worth noting however, that freelancers may choose to have their operations taxed as a C-corporation if they structure their business as a limited liability company. When forming an LLC, members may choose to be taxed as a sole proprietorship/partnership or as a corporation. Being taxed as a C-corporation essentially means that your business-related tax obligations will be handled separately from your personal return.
Freelancing Business Formation Assistance Is Available
Embracing the c-corp formation process will allow your work specific protections under the law, eliminate the risk of certain penalties and may limit your personal liability. If you are interested in formally registering your freelance business, please consider contacting LawTrades today. Our affordable, efficient and effective approach to the formation process is perfect for freelancers interested in legally recognizing their operations.