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Freelancers: Sole proprietorship vs LLC vs S Corp?

almost 4 years ago from , UX Designer. Writer & Publisher @ UXBeginner.com

We designers tend to juggle a lot of work. Some of us do a mix (and maybe all) of the following:

  • Work a regular wage job
  • Take on freelance clients on the side
  • Maintain a side project/business that makes some money

Curious what your business setup is for taxes. Especially if any of you are an LLC that elected to be an S Corp.

Will happily take referrals to your accountant!

17 comments

  • Max Foundry, almost 4 years ago (edited almost 4 years ago )

    Hey Oz.

    So sole proprietorships are the easiest to do if it's just going to be you owning it. If you have partners you'll have to pay them like vendors plus it's more difficult to work your partners in if you sell it.

    But the primary reason to do an LLC or an S Corp is for the protection from personal liability. And that is a pretty good reason. But you'll need to set up some basic legal documents, keep separate books, and file taxes for the entity. So if you are thinking this is less is less than $10k in revenue might not be worth the $1k a year plus the work for taxes and bookkeeping and state filing fees.

    5 points
    • Oz ChenOz Chen, almost 4 years ago

      Thanks for the info - good point on the balance between setup costs vs liability protection

      0 points
      • Breena Fain, almost 4 years ago

        However you get things set up (I'm under LLC but also a full-time freelancer), I highly recommend Quickbooks Self-Employed. It's great for tracking quarterly taxes, deductions, etc. It's pretty cheap, too.

        2 points
        • Oz ChenOz Chen, almost 4 years ago

          Sweet, adding this to my list of software to check out. I've also heard great things about FreshBooks.

          0 points
  • Chris YorkChris York, almost 4 years ago

    It depends on a few things, like how much money you make, if you have partners, what you plan to do with the business in the future (e.g. raising VC money), etc.

    But hypothetically, let's say you're a one-person shop and are making good money—an LLC electing to be taxed as an S-corp is may be the best fit for you.

    This adds very minimal complexity to your taxes (especially compared to an S-corp) and will likely save you a lot of money through avoidance of self-employment tax. For example, if you make $150,000 as a freelance designer and are a sole proprietor, you'd pay a ~15.3% tax on that income. If you had an S-corp or LLC with S-corp election, you could pay yourself, say $70k (or whatever is a reasonable salary for your location/services/experience) and claim the rest as a dividend. You would not pay the self-employment tax on the dividend, which would save you over $12k. The total cost of this would be a couple hundred a year to an accountant and/or tax attorney, which are write offs, and to the state for fees. In most states, the setup cost will be a few hundred dollars (California is particularly nasty and it's around $800 to set up and the same annually going forward; most states are $100-400).

    One specific note here: to do this correctly, you need to pay yourself a salary through some kind of payroll software, like Gusto ($45/mo).

    3 points
  • Esther Schindler, almost 4 years ago

    Honestly, ask your accountant. Some of these things vary by the state you're in. (In more ways than one, I guess.)

    If you happen to be in Arizona, I'm happy to recommend the guy I go to.

    2 points
  • Art VandelayArt Vandelay, almost 4 years ago

    IANAA - but from what my accountant has told me an S-Corp is only worth it if you make over 6-fig. Mostly cause the cost of operating as an S-Corp outweighs the benefit if you make less.

    2 points
  • Tony Jones, almost 4 years ago

    LLC in Delaware. You will need a registering agent and all that, so a service like legalzoom.com will make the process easier/cheaper for you.

    1 point
    • Oz Chen, almost 4 years ago

      Heard about the benefits of incorporating in tax-friendly states, but based on my research it appears safest to incorporate in my state of residence.

      0 points
      • Tony Jones, almost 4 years ago

        Yea, it really depends on what state your business transactions are happening in and what you plan to do. If you want to find venture capital or are going into business with others, then Delaware has the most benefits. If it's just a small company with a few customers, with no growth plans, then your home state is usually fine.

        0 points
  • Jon MyersJon Myers, almost 4 years ago

    When I lived in the US, I found the Freelancer’s Union very useful and I was a member. They may be able to help you evaluate some of your questions based on your specific situation.

    https://www.freelancersunion.org/

    In general, it’s better to be incorporated as a business entity and run your business through that entity. In some cases, depending on the customer, it’s required.

    If you're a single member of your company, an S-Corp (again, case dependent) is unlikely the best type of entity. An LLC formed in the right state may make more sense.

    A Wyoming LLC offers independents and freelancers some of the best options.

    It’s a pro-business state, there are not a lot of crazy fees and red tape. Your company file is online and accessible.

    They are also fast to set up. Usually a few days.

    In terms of asset protection, their structure gives your assets more protection.

    They offer single member LLCs specific rights and legal protections as well.

    Finally, there is no sales tax or income tax in Wyoming.

    If you Google around, you will find companies that specialize in just Wyoming LLC formation with boiler plate operating agreements, etc.,

    Good luck.

    1 point
  • Max LindMax Lind, almost 4 years ago

    Has anyone in this situation used a service like LegalZoom or the like to help with the finer, legal details?

    Seems that there are plenty of awesome services to help with the financial side of things... but you don't often hear too much about the prep/setup side.

    1 point
    • Oz Chen, almost 4 years ago

      Bump this question. I see LegalZoom advertise a lot and show up in Google search results. Think I'll just go the route of setting up myself with the guidance of an experienced accounting/finance staff (which I'm going to pay for anyway)

      0 points
  • Nick MNick M, almost 4 years ago

    The advice I got was always LLC.

    I worked for an S Corp that went bankrupt and there were tons of personal entanglements that the owner had as a result.

    1 point
    • Oz Chen, almost 4 years ago

      Hm good to know. I just learned that an normal LLC can elect to become an S Corp, so it seems like the smart thing starting out is to just go with an LLC.

      0 points