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Should I start as an LLC? A sole proprietorship? What’s this about an s corp and a c corp? I’m confused, so let’s work this out together.
Welcome back to our series “In the AM,” in which you follow me, Angelo Mendoza, on my path from independent freelancer to fully organized freelancing business! Last time we spoke, we discussed my past working as a sports writer and my inevitable transition to tech writer, laying the foundation on which we’ll build this new business.
I understand that I set up this post to be our opportunity to flesh out my business plan, but part of that process — as I learned from the Economic Development team in Fremont, CA — is figuring out how I want to structure my business. The choice came down to two clear options: Did I want to establish myself right off the bat as a limited liability company (LLC), or did I want to start my business as a sole proprietorship?
Speaking to other freelancers with their own DBA, the consensus is LLC. The reasoning for creating an LLC as opposed to a sole proprietorship was two fold: (1) an LLC provides personal liability protection, and (2) it allows for more flexibility when it comes to taxes.
Protect yourself before you wreck yourself
Serving as a formal business entity, an LLC essentially separates you from your business. As an owner in an LLC, you’re simply considered a “member,” of which there can be an unlimited amount. In layman’s terms, an LLC differs from a sole proprietorship in that the latter doesn’t separate you from your business. In a sole proprietorship, you are the undisputed owner.
Falling into debt in a sole proprietorship can be absolutely disastrous, as creditors are capable of taking your house, your car, and other personal assets. An LLC protects your personal assets from seizures relating to any business debt, making it very popular among freelancers.
Personally, my mother (also a business owner) was adamant I should file as a sole proprietor (like her). She explained that it was by far the easiest way to structure and the path of least resistance. For a person looking to immediately start their business, this would make sense.
However, I’m looking to make this more of a marathon; not a sprint. Time is my most valuable resource, but I’m in no rush. I figured we might as well do this the right way the first time around. But let’s move on to tax implications!
Death & Taxes!
We didn’t get too much into it at the time (which means I’ll likely be making a more in-depth follow up to this post in the near future), but from what I understand, an LLC allows for more tax flexibility because you become capable of filing as a sole proprietorship OR a corporation.
And that’s where the terms of “s corp” and “c corp” come into play! Both are different tax classifications available to LLCs, and each have their own implications. Put simply, an s corp seems to be the more popular choice considering it makes the owner/member exempt from federal corporate income tax; instead, the owner pays taxes on specific dividends.
Conclusion
Like I said, we can get more into tax implications another time, but I’m pretty set on starting out as an LLC as opposed to a sole proprietorship. That being said, I’m not ENTIRELY sure about HOW to get started with filing an LLC! There’s a few options out there that have come across my desk over the past couple days, such as ZenBusiness, Incfile, and Tailorbrands.
We’ll take a look at all three in my next post. Thanks for taking the time to read this, and be sure to comment below with your thoughts. Talk to y’all next time…In the AM!
