Choosing the right business structure
Posted on June 3, 2008
Filed Under Business |
When starting any new freelance design agency, a decision needs to be made on the type of structure for your business. Most everyone I talked to about this choice (actually not “most everyone” but everyone ) said that the beginning solo freelancer basically has two choices: sole proprietorship or limited liability corporation (LLC). I went with a sole proprietorship for my own design agency because initially it saves some money, however there are pros and cons with each. If you are going into business with a partner, then you’ll want to consider a partnership.
So what are the pros and cons between sole proprietorship and LLC? One of the biggest factors is risk involved with your business. As the IRS website explains, LLC business owners “have limited personal liability for the debts and actions of the LLC”. This means that should someone decide to sue you for any problems they want to blame on your company, then you cannot be held personally responsible (liable) for any judgments against you. In other words, you won’t have to pay out of your own personal money, instead, the company is held responsible. That is a very simplified explanation and I would encourage you to read more on it. Another advantage with LLC is that, like a sole proprietorship, the business itself is not taxed on profits. The owner just files taxes normally, and specifies any business income or losses as part of their personal tax return.
The sole proprietorship does have advantages too. The main advantages being lower start-up costs and you can still file the quick and relatively easy 1040 tax form. Plus, you always have the option in the future to switch to an LLC, once you are comfortable with the business and you have things running smoothly.
I don’t foresee my own business remaining as a sole proprietorship forever. At some point I can see where there may be a need to gain some of the protection provided by an LLC, but for just starting out, a sole proprietorship was the quickest and least expensive way of getting started. That being said, don’t take my word for it - do the research and find out what is best for your own business. You need to make informed decisions if you want to succeed - there’s just no getting around it!
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This is a good topic when starting out. The LLC structure is a popular business structure when having partners or employees for your business. I have since decided to go the route of sole proprietor for now since it is just me doing my business. Later as I grow, I hope to change it to an LLC, which is not that much more expensive.