What’s the best structure for your freelance business?
Freelancers have several options when it comes to choosing the right business structure or “entity” for their needs. Each entity type has its own overheads, rules, tax implications, and filing requirements. It’s helpful to understand the impact of each before starting your new freelance business.
Key takeaways
So, you're starting a freelance business. One of the first choices you'll need to make is how your business will be treated for legal and tax purposes—otherwise known as a "business entity." Don't worry, it's not as complicated as it sounds.
As a US-based freelancer, you have a few choices regarding the type of business you run. By default, you'll be treated as a "sole proprietor" when you create your business. There's nothing wrong with this, and you'll include your self-employment income when you file your tax return. Plus, you'll be responsible for tracking your taxes and making estimated quarterly payments to your state and the IRS.
However, certain types of businesses provide you with other advantages. These might include increased legitimacy, liability protection, or tax savings. I'll break down each one so you can make the right choice for your freelance business.
The different types of business structures
It’s easy to think of freelance work as a paid hobby, and to believe you don’t need to “run a freelance business” until you make it a full-time job. In fact, if you make money from selling your creative products or services, you’re already a freelance business—even if you haven’t formalized it.
The good news is that freelance businesses don’t have to be complex, and in some cases, you don’t even need to file any special paperwork. It’s helpful to understand the different types of business structure though, as they can have an impact on the forms and taxes you file and can even affect how much tax you pay.
Here are the different types of legal business entities, and a very brief explanation of why you might choose each.
Sole proprietor—you will be this type of business unless you choose to form another type. Perfectly fine for most freelancers as it’s simple and easy to run.
Single Member Limited Liability Company—Helps you protect your personal assets (liability protection) and gives you a slight reputational boost, but will probably cost a few hundred dollars a year in fees.
Multi-member Limited Liability Company—This type of business has the same benefits as a single-member LLC, but you can use it if you own the company with someone else.
Limited Liability Company (taxed as an S Corp)—The same benefits as an LLC but saves you some money on tax if you earn more than around $60,000 a year.
Partnership—Use this if you’re in business with someone else and don’t want to form a multi-member LLC.
S Corporation—the real benefit is the tax savings, and it’s much cheaper and easier to be an LLC and choose to be taxed as an S Corporation instead.
C Corporation—You won’t ever need this.
Alright, let’s cover each of these legal entities in more detail so you can learn what you need to start your freelancing business.
Sole proprietor freelancers
If you’re a solo freelancer working by yourself, then your easiest option is to be a sole proprietor. It’s straightforward and simple to run a sole proprietor freelance business from a legal and tax perspective.
A sole proprietor is the “default” type of business you will be—if you do not choose to be some other type of freelance business.
You don’t need to file any paperwork before you start earning money as a freelance sole proprietor.
There’s no legal requirement to have a separate business bank account as a sole proprietor (although a separate account makes bookkeeping much easier).
You don’t need to have an Employer Identification Number (EIN) as a sole proprietor unless you employ other people, although it might still be a good idea.
There are not typically any additional regulatory fees for being a sole proprietor.
Taxes for sole proprietor freelancers
Freelance taxes for sole proprietors are relatively straightforward and simple.
Your freelance sole proprietor earnings “pass-through” to your personal tax return where you will report and pay taxes.
Sole proprietors normally file a Form 1040 with attached Schedule C and Schedule SE for their freelance business.
You don’t normally need to file other tax returns or documents for your freelance earnings.
Because you’re a sole proprietor automatically, many freelancers operate as this type of business for their entire career. It does mean you won’t get the liability protection of an LLC, or the ability to reduce your self-employment tax through being taxed as an S Corporation—but it does minimize the hassle of paperwork and tax reporting.
Single-member Limited Liability Company freelancers
If you’re a solo freelancer who wants “liability protection” and a slight reputation boost for running an “official” business, you can choose to form a single-member LLC.
A Limited Liability Company (LLC) is a “separate business entity” that you create by filing a specific form—Articles of Organization—with your Secretary of State. The main benefit provided by a freelance LLC business is “liability protection” which separates your business assets from your personal assets. It’s also likely that being an LLC can boost your reputation, and make it easier to get a business bank account.
If you’re the only person that “owns” the LLC, it is considered a single-member LLC. Single-member LLCs (where you are the only owner or member) are treated similarly to sole proprietors for tax purposes.
You need to file “Articles of Organization” with your Secretary of State to start an LLC.
LLCs are required to have a separate business bank account, an EIN, a Registered Agent, and, in many states, to file an annual or other periodic report.
You will be charged a filing fee to form an LLC and will need to pay an ongoing fee if your state requires an annual or biennial report.
There are typically fees of up to a few hundred dollars a year for running an LLC.
Taxes for single-member LLC freelancers
Freelance taxes for LLCs are relatively straightforward and simple.
Your LLC freelance earnings “pass-through” to your personal tax return where you will report and pay taxes.
Single-member LLC owners normally file a Form 1040 with attached Schedule C and Schedule SE for their freelance business.
You don’t normally need to file other tax returns or documents for your freelance earnings.
I run my freelance business as an LLC, and it’s a very small administrative overhead, although I do pay extra fees each year. I mainly run as an LLC due to saving money through S Corp taxation (more on that below), and because I believe it looks more professional when dealing with business clients, who are my main customers.
Multi-member Limited Liability Company freelancers
An LLC can also be formed in partnership with other owners. This is known as a multi-member LLC and is formed with the Secretary of State by filing Articles of Organization. It’s extremely helpful to have an operating agreement that defines how important decisions are made in your business.
Taxes for multi-member LLC freelancers
Multi-member LLCs are treated similarly to single-member LLCs for tax purposes, although they must also file a 1065 Partnership tax return in addition to other tax returns. Rules for a multi-member LLC are similar to those for a partnership (see below). Speak to your accountant about multi-member LLCs and taxes.
I own my freelance LLC with my wife, so prior to filing taxes as an S Corporation, we were considered a multi-member LLC.
Limited Liability Company (taxed as S Corporation) freelancers
A single- or multi-member LLC can choose to be taxed as an S Corporation by filing Form 2553 with the IRS. This can reduce the amount of self-employment tax you pay, although it only really becomes worthwhile if you’re earning more than around $60,000 a year.
Taxes for LLCs taxed as S Corporation freelancers
LLCs taxed as S Corporations must file and pay payroll taxes throughout the year and must also file Form 1120S in addition to other forms at tax time.
For more information on forming an LLC that’s taxed as an S Corporation, please see the section on S Corporations below.
I’m currently a multi-member LLC filing taxes as an S Corporation. This does make my accounting fees a little more expensive, although I am saving some money in self-employment / payroll taxes.
Partnership freelancers
If you own your freelance business with someone else, then you’ll be classed as a partnership if you don’t file as some other type of business.
You don’t need to file any special paperwork with your state to be treated as a partnership. Partnerships require additional tax forms and administration above what is normally required for sole-proprietors or single-member LLCs.
You’ll file a 1040 with Schedule SE and Schedule K, and a 1065 Partnership return at tax time.
A partnership is a type of business formed by two or more people who own the business together. You don’t need to file any forms or paperwork to be classed as a partnership, you just need to be in business with someone else.
You don’t need to file any paperwork to start earning money as a freelancer in a partnership.
There’s no legal requirement to have a separate business bank account as a partnership (although a separate account makes bookkeeping much easier).
It’s extremely helpful to have a partnership or operating agreement that defines how important decisions are made in your business.
You don’t need to have an Employer Identification Number (EIN) unless you employ other people.
Taxes for partnership freelancers
Your freelance partnership earnings “pass-through” to your personal tax return where you will report and pay taxes.
Each partner normally files a Form 1040 with attached Schedule K and Schedule SE for their freelance business.
Partnerships are also required to file a Form 1065 Partnership return.
In some states, spouses who own a business together will be classed as a partnership and will also need to file a Form 1065.
You can also file paperwork with your state to form a multi-member LLC, but you will still need to file a Partnership return.
Speak to your accountant about partnerships and taxes.
S Corporation freelancers
An S Corporation is a type of business structure that can be formed with your state. S Corporations do potentially have some tax advantages over other types of business structure, and can be a good alternative choice for freelancers. But, it’s often much easier to form an LLC, then choose to be taxed as an S Corporation, rather than forming an S Corporation directly.
An S Corporation is often suggested as a way for freelancers to save money on their self-employment taxes, but it’s not that straightforward. There are certain costs associated with running an S Corporation that can significantly reduce the benefits of the tax savings. These costs include paying for payroll software, losing out on claiming some of your earnings as Qualified Business Income, extra unemployment taxes, and extra accounting costs for filing 1120S returns.
There’s also more of an administrative overhead for running an S Corporation. Typically, if you earn under around $60,000 a year as a freelancer, it’s unlikely that an S Corporation will save you much money and may even cost you more than you save.
You can always start a standard LLC and run that until it makes sense to file Form 2553 to convert to an S Corp.
You need to file formal “Articles” with your Secretary of State to start an S Corp or an LLC.
S Corps are required to have a separate business bank account, an EIN, a Registered Agent, and, in many states, to file an annual or other periodic report.
You will need to pay a filing fee to form an LLC.
S Corp owners are classed as “employees” and a portion of earnings must be paid through a payroll service.
Other S Corp earnings can be taken out of the business as an “Owner Draw.”
Taxes for S Corporation freelancers
Some of your freelance S Corp earnings “pass-through” to your personal tax return where you will report and pay taxes.
Each S Corp owner normally files a Form 1040 with attached Schedules for their freelance business.
S Corps are also required to file a Form 1120S, U.S. Income Tax Return for an S Corporation return.
S Corps are required to run a payroll and pay a salary to their employees and owners.
Creating, filing, and paying taxes as an S Corporation can be complex. Speak to your accountant.
C Corporations
A C Corporation is a type of business structure that can be formed with your state. C Corporations are mainly intended for bigger businesses that intend to trade shares on the stock market, and are way more than freelancers would typically need.
C Corporation freelancers and taxes
Freelancers will almost never need to form as a C Corporation. If you’re thinking about it, talk to a business attorney or accountant.
A sole proprietor or a single-member LLC business structure will be suitable for most freelance tax needs.
Unless you’re planning world domination as a freelancer, you’re never likely to create a C Corporation.
See our freelance guides on related topics
Please note that I am not a qualified professional and I do not provide tax, legal, accounting, or similar advice. These guides are provided for informational purposes only. Always consult with a qualified professional on your unique circumstances. You can find more information in my disclaimer.