Note: We are not legal experts or tax preparation professionals, so always consult an accountant, tax prep professional, or attorney if you have concerns. This information is aimed at freelancers in the United States. If you want to legally start a freelance business in other locations, you may find this information useful for determining what questions to ask and answer based on your city, country, or region.
This is one of those questions that feels a lot bigger than it truly is. The official information can be confusing, full of jargon, and frankly can present an outsized roadblock for new freelancers wanting to do things by the book.
For most of us, the answer is rather simple: you can legally start a freelance business by setting up a sole proprietorship. This structure is not only enough to get us started, but is typically all we ever need.
You can—and should!—treat your business like a real business! But that doesn’t necessarily mean you need to incorporate under an LLC. Filling out the paperwork to get those letters won’t make your business more official or successful. And your clients care far more about the quality of your work than the structure of your business.
But let’s outline the available options so you can make an informed decision as quickly as possible. (And then you can get back to building a successful business!)
You Can Legally Start a Freelance Business as a Sole Proprietor
The most common business structure in the U.S. is a sole proprietorship. This designation means there’s one individual running the business, and it isn’t incorporated.
In fact, the government automatically considers you a sole proprietor as soon as you start your business, as long as you don’t register under another structure.
Do sole proprietors need to worry about liability?
Business owners who incur risk might not want to use a sole proprietorship. But generally speaking, freelancers don’t have this problem.
Since you’ll be delivering completed and approved projects to your client, it is completely you clients’ responsibility to ensure it’s used appropriately. There are virtually no instances where a freelancer would be liable for anything.
Can I still get an EIN as a sole proprietor?
Yes! It is possible, and highly recommended, that you get an Employer Identification Number. We recommend you do the little bit of required paperwork so that you won’t have to give out your social security number when clients ask you to fill out a W-9.
Do I have to use my legal name?
Nope! You can set up a DBA (Doing Business As), which will allow you to accept payments under a nickname, pseudonym, or any name you can dream up. (But don’t get carried away trying to decide on the perfect name for your business.)
What is a Limited Liability Company? (LLC)
Structuring a business as an LLC is a way for business owners to protect themselves and their assets (house, car, etc.) if they were to be sued. If this is a realistic possibility in your industry, you might want to consider this route. But for most of us, there’s simply not any liability to worry about.
Are there tax advantages for an LLC?
A single-member LLC is taxed exactly the same as a sole proprietor. Both business structures are required to pay self-employment tax.
On the flip side, if you legally start a freelance business as an LLC, you will incur at least a few fees when you register. And, while it varies from state to state, you may also be required to file an annual report along with more fees.
How Does an S-Corp Work?
An S-Corp is one of a few types of corporations. (You can dig into the IRS definition here.) It may seem like an attractive option because profits are not taxed at corporate rates.
In other words, you might be able to save some money by not having to pay self-employment tax.
But, there are several regulations that make this structure prohibitively complex, despite the tax savings.
- S-Corps need to be registered at both the State and Federal levels.
- You must pay yourself a salary that’s comparable to what others earn in your field.
- Not all states recognize the S-Corp designation.
Are income and self-employment taxes a major concern for you? It’s easier to use business and personal deductions to reduce your taxable income than it is to manage an S-Corp. (And yes, deductions are perfectly legal.)
It Doesn’t Have to Be Complicated to Legally Start a Freelance Business
Building your business is hard enough. We encourage you to keep it simple whenever possible! And remember, what you decide right now is not written in stone. You can always change your mind later if it turns out another structure will move your business forward.
We’ve outlined the most common options. Consult legal and tax experts for more precise guidance. And then make a decision about the easiest and most sensible way for you to legally start a freelance business.
Your turn! What structure did you choose for your business and why? Tell us in the comments below.
Last Updated on July 1, 2023 by Craig Galo