What types of business structure do self-employed business owners typically use?
The best structure for your business is going to vary based on the type of company you have, including the industry in which you operate. Personal preference and your tolerance for risk are also bound to have an impact on the type of business structure that makes sense for your situation.
Below are some of the most common business structures that self-employed individuals use.
Sole proprietorship
By some estimates, there are over 23 million sole proprietorships in the United States. It is by far the most common business entity for small businesses. Sole proprietorships sometimes include those companies that use a DBA (or “Doing Business As”) as well. However, that does not necessarily mean it is your best option.
Sole proprietorships work well for those who want to do occasional freelance work and who likely have very little liability potential for their work product. However, a sole proprietorship can be a risky business structure. There is no difference between your business and personal assets, which can place everything you personally own at risk for business liabilities and debts.
Limited liability company
An LLC (limited liability company) is another common business structure for entrepreneurs. While not as common as a sole proprietorship, an LLC is a popular choice because it is not as complicated as other options.
Starting an LLC is relatively simple for most small business owners. Governed by an LLC Operating Agreement, an LLC is also very customizable in terms of management and operation structure.
LLCs offer liability protection while also streamlining ownership requirements. They work well for someone who may have some potential liability because they offer more protection from legal issues than working as a sole proprietor would provide.
S corporation
An S corporation (or S-corp) is a type of corporation that has more simplified tax reporting requirements, including using an individual tax return to report income. It also has fewer legal requirements to maintain it compared to a C corporation. In addition, it provides legal protection without the need to have shareholders.
C corporation
A C corporation (or C-corp) is perhaps the most complicated self-employment business structure. It requires specific steps to create and maintain the structure. However, it is also the easiest business structure to use when it comes to transferring and sharing wealth with others. C corporations allow for shareholders, which is generally not an option in other business structures. Shareholders can help fund a startup and involve others in the company.
How do self-employed business owners structure their finances?
All businesses, no matter what kind of legal structure they have, are likely to benefit from taking steps to separate business funds from the owner's personal funds. When personal money and business money are intertwined, tax time gets confusing. It can also undermine the liability protections provided by any business structure that you create.
Set up a small business bank account.
Setting up a small business bank account is an effective way to separate funds. It makes tracking payments and expenses easier as well. It can also help you accept various forms of payment, including credit cards or electronic payment methods.
An employer identification number (EIN) is required to create a small business bank account. You can apply for an EIN from the IRS website. This process is easy and free under most circumstances.
Hire the right kinds of financial professionals.
Some self-employed individuals hire various professionals to help keep up with financial and tax obligations. These individuals might include:
- Bookkeepers.
- Accountants.
- CPAs.
- Financial Planners.
- Attorneys.
An accountant or CPA can help plan for upcoming business expenses, while a bookkeeper prioritizes tracking sales, income, and business expenses. Ultimately, good record-keeping helps professionals find and utilize income tax savings, including business tax deductions, paying appropriate self-employment taxes, and addressing other types of business tax.
How do you protect your brand and intellectual property?
If your company makes anything, it's a good idea to start thinking about protecting your intellectual property. Creative items include any type of art, including writing, music, paintings, and drawings. They can also include software, products, business methods, and inventions. The long-term success of a business may even depend on protecting these important creative items. Self-employed individuals can do this through copyrights and patents.
Self-employed individuals sometimes overlook the fact that some of the most basic aspects of their business can be protected as well. A registered trademark, for instance, can protect things like a business name, marketing methods, slogans, and logos.
However, small businesses have a responsibility to make sure that their logos and business names are not already in use long before they open their doors. Failing to take this critical step can result in legal liability. It can also force you to restart your business from scratch to avoid infringing on someone else’s intellectual property rights. Do not skip searching for a potential business name!
Intellectual property is critical, but it can be a challenge for any business. Consult a knowledgeable lawyer for help with this particularly important area.
What types of contracts do self-employed workers want to have ready to go?
Contracts are critical in any business, but small business owners often do not take full advantage of them. A written contract can help everyone get on the same page for a deal because it sets out all of the terms and conditions of an agreement. Further, a written contract serves as evidence of an agreement, so there is no “he said, she said.” Instead, a written, signed contract states all of the terms of the agreement.
From getting hired to hiring help, self-employment often requires doing more than just your normal line of work. Instead, you have to create and maintain various contracts to run your business. Below are some of the most common contracts that self-employed individuals rely on.
- Independent Contractor Agreements. An Independent Contractor Agreement is used for the self-employed person to perform work as a freelancer, but they can also be used when hiring additional help to work for your business. This contract defines the scope of work, payment terms, timelines, and more.
- Service Contracts. A Service Contract is often drawn up between the self-employed individual and a person or company that provides a service. Examples might include bookkeeping services, cleaning companies, or IT services.
- Non-Disclosure Agreements. A Non-Disclosure Agreement is a contract that specifically requires parties not to share certain information. Employers use this for employees who are working with confidential client information or use certain business methods.
- Vendor Agreements. A Vendor Agreement is recommended for any time you use a vendor. In some situations, a vendor contract is as simple as a verbal agreement followed by an invoice. In other situations, a vendor contract can set out a long-term relationship to provide goods.
Depending on the type of business you use, you might consider many other types of contracts.
Get help for your business from Rocket Lawyer.
Rocket Lawyer provides an array of resources for self-employed individuals to start up and maintain their businesses. We provide tax filing services, business filing services, and a huge document library of resources. Plus, you can contact a Rocket Lawyer network attorney to be put in touch with a real-life, licensed lawyer who can answer your specific questions.
A Rocket Legal+ membership is the perfect choice for small business owners, offering steep discounts on all of the business filing services mentioned above and attorney services, in addition to unlimited access to customizable business documents and electronic signatures. At half off the monthly Rocket Legal membership, it is truly the best membership for small business owners.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
