As this tax season comes to a close you might be asking yourself whether you should stay as a sole proprietor or become an LLC business next year? The two terms can be confusing, especially when it comes to saving as much as you can from your hard earned income.
If you are in the beginning stages of working for yourself then now may not be the right time to invest the energy and expense of becoming an LLC. Thankfully there are a few different legal answers that can help guide us along as we plan ahead for 2018.
Each state has its own set of rules for business owners and so you will want to look that up on the treasury website for more information. Here’s a basic overview of the difference between an LLC and sole proprietorship so that you know which direction to head in.
Limited Liability Corporation or LLC
This is a structure that you should build up to as a solopreneur or freelancer, and requires more steps to go through in order to create a personal or business name with LLC attached to it. According to Nolo your personal liability is reduced because your tax filing is independent of your personal taxes. You also get the benefit of more profit and loss opportunities each year. It’s time to go this route when:
- Your business has grown and now hires employees or contractors
- You plan on approaching investors
- New partnerships are emerging
Two benefits of filing as an LLC are the tax savings and protection against individuals for things like lawsuits, debts, ect. The disadvantages are the cost of legal fees and forms involved according to your state, which can increase annually. For example, you could be paying anywhere from $300 up to $1,000 to become an LLC business.
As a new business owner with a limited budget you may be filing this status using the 1040 Schedule C form for your expenses. In fact, 75 percent of small businesses in the United States file under this status according to Inside the Box. Because you are not under the covering of a partnership or corporation you are liable and responsible for any risks and liabilities. This is a good idea when:
- It’s your first time as a freelancer
- You don’t plan on hiring employees or contractors
- Your business is not a startup needing capital
- You have a low budget
As a solo business you are responsible for filing your own taxes, which are done on your personal form. The benefit of this type of filing is that you are not answering to a partnership, which gives you more control over your business. It’s also less expensive as you don’t need to pay for legal services and forms. I recommend filing for an EIN number with the IRS instead of using your social security number, as this is more secure when dealing with multiple clients. The disadvantage is that your are liable for debts and any lawsuits that might occur.
As you make the decision to either become and LLC or stay as a sole proprietor it’s important the weigh the pros and cons of each and have a plan mapped out of where you see your business going in the next year. If it’s still small without the need for capital or employees then it may make better financial sense to stick with what you have until you start to grow. A business that has a higher profit margin, however; may benefit from more tax write-offs and protection of personal assets.
Check with a good CPA and have them do an overview of your current portfolio before making a final decision. Depending on which state you live in you might want to consider filing for an LLC in a place like Delaware, Wyoming or Nevada, which offer lower tax rates for businesses.
It’s not hard to become an online freelancer or start your own business while working in a full-time job. Just download my free eBook, and get started on your career today: