Independent Contractor – Pros and Cons of Sole Proprietorship, Limited Liability, and Corporation

Before you start your own business and become an independent contractor, you probably don’t think about these categories – so, let’s sort it out! In this article, you will learn the pros and cons of a sole proprietorship, limited liability, and corporation.

If you are an independent contractor who is just starting out with a new business – an important step is to figure out how to structure your business.

By definition, business structures or business entities represent the legal names that government uses to understand what sort of business you are so they can tax you accordingly. So, sole proprietorship, limited liability, or corporation – which is the best one for you?

Sole Proprietorship – What Is It and What Are the Pros and Cons?

Basically, a sole proprietorship is the type of business structure where you own and run a business by yourself. In order to form this type of business, you don’t need to take any formal action. Additionally, if you remain the only owner, you are a sole proprietor as long as you are selling your services.

Pros:

  • Total flexibility and control to run your business as you see fit
  • Unlimited liability – if needed, creditors are more likely to extend credit
  • You receive all of your business profits.

Cons:

  • You are liable for all business debts – If your business assets aren’t enough to settle a claim, you can lose your personal property.
  • Harder to get loans due to higher turnover rates and small assets
  • Long-term capital is harder to raise


Limited Liability (LLC) – Definition. What Are Pros and Cons?

Generally speaking, a limited liability corporation, LLC, is a type of business structure that combines flow-through income taxation (like in a sole proprietorship) with the limited liability of a corporation. Important to realize is that LLC is not a corporation. However, it’s a legal form of a company that provides limited liability to its owners.

Pros:

  • The flexibility of being taxed as a sole proprietor, partnership, S or C – corp.
  • Lower filing costs and less paperwork
  • You can form an LLC with one person, but the number of members is unlimited.
  • If the company runs into legal issues or debts owners are protected from some (or sometimes all) liability.

Cons:

  • You can’t pay yourself wages.
  • High renewal fees or pricey publication requirements in different states
  • Harder to raise financial capital
  • A franchise or capital values tax on LLCs in many states


Difference Between a C and S Corporation

The first thing to learn here is – A corporation represents a business structure that is legally separate from its owners or shareholders. Basically, there are two types of corporations – a C corporation and an S corporation.

By all means, the main difference is in the way those corporations are taxed. In a C corporation, the business is taxed separately from the owners. The case of an S corporation is a little bit different. Shareholders are taxed based on their shares in the company.

Pros:

  • Owners are separate from legal liability. In case of a legal issue or a debt, owners are not entirely responsible.
  • Right to enter into contracts, hire workers, give and receive loans, and own assets
  • A well–structured entity with defined roles and accountabilities
  • Possibility to sell stock – which is more interesting for investors
  • Employees can also buy the stock at a fixed-in price and receive stock benefits.

Cons:

  • The setting up process is time-consuming and expensive.
  • Lots of paperwork
  • Very little flexibility due to a high number of regulations
  • Double taxation possibility
  • Corporations have to hold regular meetings of directors and board members.


Conclusion

To sum up. Since taxes and laws are different and vary from state to state, it is important to research your home state’s regulations when it comes to forming your business. One other thing to note – the tax forms you file every year will depend on the type of business structure you’ve formed.

An experienced accountant can help you assess whether a corporation or some other business entity is best for you as an independent contractor. If you want to learn more or have additional questions – don’t hesitate! Contact YPTA today.