Business Legal Structure 4 Business Legal Structure Options for Self-Employed

• Oct 27, 2022
• |
• BestBizFinder

Determining how to structure your business is an important consideration, and one that can have tax and compliance implications. The best business structure for you will depend on many factors, including how you plan to take and maximize discounts, the type of business you do business with, and whether you intend to grow your business in the future.

Legal Business Structure Options for Freelancers

Legal Zoom 

LegalZoom offers the affordable pricing packages to meet the specific needs. Packages range from $79 to $349 (plus state filing fees) with the option to add additional services — including registered agent, tax advice, and access to a legal form and document library.

Companies can also pay a low flat rate for many types of legal work, providing ongoing access to lawyers' advice and legal reviews. Additions can get pricey but the plus side is that most LLC applications can be split into three monthly installments, but it depends on your overall total. If you were to file an LLC only, it would not qualify for the premiums.

Zen Business

ZenBusiness is the best public filing company for an LLC due to its low-cost introductory package, including an LLC filing and 100% accuracy guarantee starting at $49 plus state fees, which do not renew automatically. Additionally, ZenBusiness is a public benefit company, which means it is a for-profit company with a societal purpose similar to a nonprofit.

When starting a business, you can choose from three subscription levels. The Starter costs $39 in your first year and includes an LLC file, operating agreement form, and a 100% accuracy guarantee. The $149 per year Pro plan includes everything from a Starter plan plus faster sign-up times to compliance support. The $249 per year Premium plan adds fast filing, business domain name, website, and other features.

Inc File

 Incfile is the best value, thanks to the LLC's free registration service option, where you only pay the government registration fee. The free package includes preparing and saving your state's foundation articles and a year of registered agent service. Just look for double upsells and long-term recurring fees, as you may find yourself with some higher priced services or annual fees.

Additional plans with more services are available for a one-time fee. The $149 Gold package includes an EIN, an S corporation election, an operating agreement, tax advice, and other services. The Platinum package costs $299 and includes express registration, business domain name, and email. After your first year, you can pay for annual report filing, registered agent services, trademark filing, and other business models.

Hashtag Legal

Hashtag Legal is a boutique legal experience compared to some of the larger LLPs, but may be ideal for business founders with limited legal knowledge. We chose Hashtag Legal because it specializes in helping small businesses, entrepreneurs and online businesses with various legal needs, including forming a business entity.

One of the main benefits of Hashtag Legal over larger companies is their ability to customize offerings to your unique business needs. Business entity formation services come with legal advice, so you know if an LLC is the best option. For business owners in need, Hashtag Legal also offers business advisory services.

Sole Owner

Many freelancers start their journey as separate owners. For tax purposes, you generally work under your personal Social Security number, but you can apply for a TIN for your business by filing an IRS SS-4 requesting an Employer Identification Number (EIN) as your taxpayer identification number Instead of using your personal Social Security number.

The business is generally run in your legal name. If you wish to give the business an alternate name, you will need to register a Doing Business as (DBA) to indicate the name you intend to give your business. This process lets your state or local government know the name under which you operate your business. Specific DBA registration rules vary from the state to state. You can also apply for a federally registered trade name or trademark.

Sole Proprietorship Advantages

 Sole proprietors file on Schedule C (quarterly) but are subject to the same tax on their personal and business income. Submitting just one form each year means less paperwork and hassle.

·       It provides flexibility for those who are still fully employed and self-employed part time only.

Disadvantages of Sole Proprietor 

Do not offer corporate protection for your personal assets. This means that there is no legal difference between you and your business assets. If you are sued or become bankrupt, your personal assets are related to your business and will be available to debtors.

Limited Liability Company (LLC)

The LLC structure was originally designed to protect business owners from certain obligations related to the business, and since then the LLC structure has become popular with freelancers due to its simplicity, with strong corporate legal protections protecting your personal assets. Think of it as the next step above the sole proprietorship.

LLC Advantages

Simple and inexpensive to prepare; It requires less paperwork than C and S Corporations.

·       For tax purposes (unless a special selection is made), a single owner LLC is not a single, separate entity, but does provide some protection legally from things like unsecured debt and court rulings.

·       It is seen as the "first structure" that freelancers seek to gain some measure of legal protection.

   LLC Disadvantages

If you take certain actions, including but not limited to actions such as personal security of debt, or become a personal part of a contract, or if you mix your personal funds and activities with the activities of the LLC business, you may be exposed to a “puncture” of the veil Company", assuming personal liability for the obligations of the LLC.

·       You still have the obligation to run your business as a separate entity to ensure that you retain the value of the limited liability company's limited liability.

·       LLC earnings are usually subject to self-employment taxes. While you won't incur corporate taxes as you do with other structures, you will account for any LLC earnings on your personal tax returns. Some states may also impose an additional "franchise tax" on LLCs.

   A Subsidiary of S Corp or S Corp

Also referred to as S-Corp, it is a business structure that has received sub-chapter designation from the IRS. According to the IRS, statutory S-Corps is a unique and separate entity from those who own it. With this structure, subject to the similar exceptions described above for LLCs, you have limited legal liability (separation of personal assets from your business) for a separate legal entity as well as a separate tax entity.

Provided the owners qualify for a timely election with the IRS, the profit from your business is reported under a separate tax return form 1120S, but the taxable profit goes to your personal tax return on the Form 1120 K-1. Thus, there is generally only one level of taxation.

S Corp Advantages 

·       Profits and losses are passed on to the shareholder's personal tax return (whether or not it has already been distributed). This means that the business is not subject to tax per se; only shareholders. However, there is an important caveat: any shareholder working for the company must pay himself a "reasonable compensation".

·       The shareholders must be paid at a fair market value, or the IRS may reclassify any additional corporate earnings as wages, and the S-Corp will need to pay employment tax — both the employer's share of Social Security and Medicare taxes on all wages. Any remaining gain or loss is then passed on to the owner's tax return via 1120 K-1 and is not subject to self-employment tax.

      Disadvantages of S Corp.

 The IRS is very much in control of S-Corp owners who pay themselves low wages to avoid the self-employment tax.

·       There are audit risks for these personal services businesses and back taxes, interest, and penalties can be costly.