As more and more of us turn to self-employment, the freelancer workforce is growing exponentially.
When you can be your own boss, set your own rates, and choose your hours, it’s no wonder that so many people are ditching the traditional 9-5 to work as full or part-time freelancers.
Although it’s appealing, becoming a freelancer isn’t easy, and you’ll have plenty of rules and regulations to get to grips with – especially when it comes to tax laws.
So, do you need a business license to become a freelancer? Well, not exactly.
We’re here to help you choose the right business entity for your freelance business and walk you through the pros and cons of each option.
What Is Freelancing?
Freelancing is a form of self-employment. If you become a freelancer, you’ll work for yourself and usually share your skills with several clients on various projects, all on a flexible basis.
If you’re a freelancer, you won’t have a traditional contract with a company. However, most freelancers will have their own small contracts with their clients.
As a self-employed worker, finding your clients and work is up to you, making freelancing more challenging than working a full-time, salaried role.
Freelancers work in all sorts of fields. Some popular freelancer roles include:
- Writers
- Illustrators
- Web Designers
- Virtual Assistants
- Copywriters
- Social media manager
- Digital Marketers
- Interpreters
- Video Editors
- Events Managers
- Graphic Designers
… and many more.
Do Freelancers Need A Business License?
For the purposes of this article, we’ll be focusing on US Law.
If you want to register as a freelancer, be aware that the rules for business registration can vary between states. However, in many cases, you WON’T need an official business license.
If you’re freelancing as a sole proprietor or general proprietor (this is the most common option), you won’t even need to register as a business unless you’re using a name that’s separate from your own (more on this later).
However, if you want to operate as an LLC or a C/S Corporation, you’ll need to register your business.
Sole Proprietorship
If you’re a freelancer, you may choose to establish yourself as a sole proprietorship. What does this mean?
Sole proprietorships are the most popular options for freelancers.
When you start freelancing, even if you’ve done nothing to register your business officially, the Internal Revenue Service (IRS) will automatically brand you as a sole proprietor when it’s time to file your taxes.
This is a term that’s given to an individual running a business. Filing taxes as a sole proprietor is simple. However, you will also need to complete a Schedule C form as part of your tax return.
Pros
- It’s easy to set up as a sole proprietor. It requires minimal effort, and you don’t need to file any specific forms.
- When it comes to taxes, you rarely need to file any additional forms. Instead, simply declare your revenue on a Schedule C form, and it’ll be automatically entered into your regular 1040 form.
Cons
- As a sole proprietor, you will be liable for any business debts that may accrue.
- Sole proprietorships don’t offer any protection for your personal assets.
S Corporations
There are two types of corporations: C and S Corporations. These letters simply refer to the tax code details for each corporation.
If you become a corporation, your entity will be completely separate from you as a business owner.
From a legal standpoint, a corporation is considered a ‘person’: corporations can take on debt and own property and must disclose how they operate regularly to ensure they’re following the appropriate regulations.
If freelancers do become a corporation, most choose to become an S-Corporation.
You’ll report all taxes, losses, and profits straight through you and will be filing a personal income tax return, which can save you money.
However, if you’re the only one running your freelance business, you can’t technically become an S Corporation – you’d need at least one other person on board.
Pros
- Your assets will be protected
- You’ll gain heightened credibility
- Your S Corp has an unlimited life, which means it continues to exist indefinitely, even after the owner has passed
Cons
- You must adopt a calendar year as a tax year
- You cannot operate as an S Corporation if you’re just one person
Partnership
Partnerships operate in a similar fashion to sole proprietorships. However, there will be at least two people running the business rather than one.
If you want to form a partnership as a freelancer, you don’t need to do anything specific.
However, most freelancers adopting this model will decide to draw up a document describing each partner’s duties and outline how business profits will be divided.
Pros
- It can be easier to raise funds for your business, as there’s more than one person that can contribute.
- You don’t have to do anything specific to set up a partnership, taking the headache out of doing complex paperwork.
Cons
- If you don’t know your partner well before going into business with them, it can turn into a legal battle. Ensure you know who you’re about to go into business with before doing it.
- If you want to get investors on board, it may be difficult to convince them, as partnerships carry a fair amount of risk.
LLC
As a freelancer, you may also choose to establish yourself as an LLC. An LLC, short for Limited Liability Company, is essentially the middle ground between a proprietorship or partnership and a corporation.
If you establish yourself as an LLC, you’ll be allowed to store all of your assets separately from your business, and you won’t have to set up as a corporation.
Unlike other methods, LLCs can be set up with just one person, which makes this another popular choice for solo freelancers.
Pros
- You can still claim your earnings on individual income taxes, which can reduce paperwork and lower your tax rates.
- You’ll get the same protections as most corporations, so there’s no risk of your assets being taken away if you find yourself in hardship.
- LLCs can be established with just one person, so you won’t need someone else to be a part of the business like you would with a partnership or corporation.
Cons
- LLCs don’t require an operating agreement, which can leave some people feeling stuck in a gray area. In the event of legal disputes, this can be tricky. However, this is only applicable if more than one person is part of the LLC.
The Bottom Line
If you’re new to freelancing, you’ll be pleased to know that setting yourself up for success doesn’t have to be a headache. You won’t even have to register as a business in most cases!
Remember: these guidelines only apply to the US, and some rules can vary between states. For more information, contact a professional.
This is not intended as legal advice, always seek advice from a competent Attorney or CPA to keep in compliance with the ever-changing laws.
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