Doing freelance design involves more than just saying you're open for business and getting a few clients. You need to choose a business structure. Explore the basic pros and cons of three primary types of business structures*.
*The information in this article applies primarily and in general to US and Canadian businesses. You should always check local laws as to forms of business, registration, and tax requirements.
SOLE PROPRIETORSHIP
The simplest form of doing business, a sole proprietorship is the structure that most freelance designers choose initially. Some stay with this form of business throughout their business life.
As the name implies, a sole proprietorship is an individual doing business under his or her own name or another name that doesn't include legal designations such as Inc. or Ltd. In some municipalities a husband and wife can be principals in a sole proprietorship without choosing a formal partnership or incorporation.
Pros
Easy to set up with few forms to file or fees to pay (generally only need to register an Assumed Name, if used, and obtain a local sales tax permit)
Business income is reported on your personal income tax form (detailed on separate business schedules or addendums)
100% ownership in the company
Cons
You assume personal liability for the business so that your own personal assets can be seized by the IRS or creditor to discharge any business debts incurred.
Doing Business As (DBA) a Fictitious Business Name (Why and How)
PARTNERSHIP
In a partnership, two or more individuals create a legal entity where the partners share in the profits. It's almost as easy to set up as a sole proprietorship although the parties need to draw up a partnership agreement outlining what each partner brings to the table and what happens when the partnership is dissolved. Partnerships can be general or limited, general partnerships being the most common. Limited liability partnerships are not available in all states or to all businesses.
Pros
Only slightly more complicated to set up than a sole proprietorship (drafting the partnership agreement)
When partners are carefully chosen the business benefits from the complementary skills and talents of each partner.
Business income and tax liability passes through to each partner so no separate tax filings are necessary for the entity.
Cons
Each partner can be held financially liable for the actions or inactions of the other partner in connection to the business.
Ownership is shared and depending on how the partnership agreement is drawn up, you may not have as much control of the business as you would with a sole proprietorship.
CORPORATION
Some businesses choose incorporation as a way to protect their personal assets and to take advantage of certain tax benefits. The C Corporation is more complicated than other business structures but may offer greater tax advantages in some situations.
Pros
Debts or other liabilities against the company do not usually pass through to the owners so that the owners personal assets are protected in case of lawsuits or bad debts.
Corporations can raise money by selling shares of stock in the company.
Corporations may be taxed at a lower rate and have better tax benefits than some other forms of business.
Cons
More paperwork, time, and expense is involved setting up and registering a corporation.
Legal requirements in terms of bookkeeping and tax filing is more complicated and expensive on an on-going basis than other business structures.
Ownership is in the hands of the stockholders and managed by the Board of Directors. Your control of the company may be limited if there are multiple stockholders and members of the board.
How to Incorporate Your Small Business in 7 Steps
The C Corporation may be the most familiar but there are other forms of incorporation including the the limited liability corporation or LLC which offers some of the benefits of both a corporation and a partnership and the S Corporation where taxes are handled similar to a partnership or sole proprietorship.
No comments:
Post a Comment