How you structure your business is an important consideration, one that may carry tax and compliance implications. The best business structure depends on many factors, including how you plan to take and maximize deductions, what type of businesses you work with, and if you intend to grow your business in the future.
We have discussed each structure with the following assumptions:
We’ve given a basic overview of each structure, including its pros and cons, below.
Many independents begin their journey as sole proprietors. For tax purposes you generally operate under your personal Social Security number but you can apply for a Taxpayer Identification Number for your business by filing an IRS SS-4 asking for an EIN (or Employer Identification Number) as your Taxpayer Identification Number instead of using your personal Social Security Number.
The business is generally run under your legal name. If you want to give the business an alternate name, you’ll file a “Doing Business As,” or DBA, to state the name you intend to give your business.
Originally designed to protect partners in business, the LLC structure has since become popular for “single members” due to simplicity, but yet, strong legal protections of a corporation shielding your personal assets. Think of it as the next step above a sole proprietorship.
Also referred to as an S-Corp, this is a corporation that has received the Subchapter S designation from the IRS. According to the IRS, S-Corporations are considered by law to be a unique entity, separate and apart from those who own it. So here you have the limited legal liability (where your personal assets are separate and isolated from your business) of a separate legal corporate entity as well as the separate tax entity. Here the profit from your business is filed under a separate tax return filing form 1120S, but the profit does still pass through to your personal tax return on form 1120 K-1.
An attractive option for the savvy independent professional, C Corps make owners shareholders.
A C Corporation is the same status that Fortune 500 businesses hold – they are corporate entities separate from their owners. In the case of an individually owned C-Corporation, you are not just the owner of your company, but the majority shareholder.
Because the corporation is a separate legal entity, it is an individual taxpayer in the eyes of the IRS. While this structure is one of the most complex business arrangements available, it is also the most sophisticated – and an attractive option for the savvy independent professional as well.
It is also increasingly popular to allow independent professionals to work under a “portable employer of record” service. In this arrangement, you are assigned a division of their large corporate structure to operate your professional services business as if it were your individual business.
You own the rights to the business as they are your clients, but you use their corporation as your business umbrella to provide limited liability (as your personal assets are segregated) and all of your profits are distributed to you as a W-2 removing the risk of audits by receiving a 1099 or by owning a personal services company.
You can also get economies of scale by leveraging their legal, corporate insurances, accounting, benefits, systems and administrative capabilities as they are spreading these services and costs across thousands of independent professional workers.
This can be a very good approach to get your professional services business started without the distractions of setting a business entity and dealing with the taxes and other administrative burdens of operating a single person business.
The MBO Partners Business Services model fits this structure, wherein independents operate their own businesses under MBO Partner’s tax ID. You receive infrastructure that manages the payroll, liability, expenses and invoicing. In essence, you receive the protection of a traditional W-2 employee without giving up the freedom of an independent, for a nominal percentage-based fee.
Whatever business structure you choose, we encourage you to always seek individual professional advice for legal and tax decisions.
Portable Employer of Record is a term referring to a category of companies that help freelancers and independent consultants manage their businesses. A PER acts as an umbrella employer for self-employed professionals, in return for a small percentage fee on revenues earned.
Use these simple steps to make sure your project meetings are informative, engaging and motivating.