Trying to figure out the right legal structure to set up now that you’re self-employed?
Some find this process one of the most confusing and tedious aspects of going into business. If you’re one of them, then you’ve likely cried of pure frustration a time or two during your legal research.
Well, what if I laid out your options in a way that will save you hours of time and headaches later on? You can thank me later. 😉
After all, I’m speaking from experience. When I was setting up various businesses, I really didn’t know which entity to choose. People gave me all sorts of advice. And not much of it was actually helpful…
I ended up floundering among the choices, and as a result, I set up a few different structures.
Ultimately, I decided to set up my consulting business as an S-Corp. Thankfully, my accountant advised that I go that route—and he was spot on! I wish I had done that from the start since being an S-Corp saves me money in taxes (compared to when I had no legal structure).
That is why I suggest taking a look at the options you have before you make any decisions.
Also, a little disclaimer: I’m not a legal adviser. I’m just sharing this helpful information based on my real-life experience and research. So I recommend discussing your options more in depth with an accountant or lawyer.
Legal Structure Option 1: Sole Proprietorship
A sole proprietorship is one of the easiest structures to set up. Unfortunately, though, it can be headache later on as you make more money.
That’s because, with a sole proprietorship, everything the business makes goes straight into your personal bank account… which often means higher taxes and no “business expense” exemptions.
The other downside is that there’s not really any legal protection. So if you screw up and someone sues your business, they could go after your personal assets since your business isn’t a separate entity.
Pros:
- Easy to implement (since there’s hardly anything to actually set up!)
- Costs next to nothing to create
- Simple to deal with come tax time (since all you have to do is include it in your personal taxes)
Cons:
- Lack of legal protection
- Higher taxes once your income increases
Option 2: Partnership
Like sole proprietorships, partnerships are super simple to set up if you want to include a business partner. And also like sole proprietorships, partnerships don’t pay business taxes—just personal taxes.
But again, we find the same problem: Little to no legal protection. If anyone sues you or your business partner, they can go after your personal assets. This is why, if you create a partnership, you need to make sure you and your partner sign an agreement!
Pros:
- Easy to set up and maintain
- Taxes are simple
Cons:
- No legal protection
- Your business partner could affect your personal finances if something goes wrong
Option 3: Limited Liability Company (LLC)
LLCs are a great option for small businesses because they provide tax exemptions and legal protection, but they’re still simple to set up and maintain.
And although it does cost money to create an LLC, the yearly fees and maintenance are minimal compared to other corporate structures.
Pros:
- Gives you legal protection in case someone sues you (they can’t go after your personal assets)
- Less maintenance than a corporation.
Cons:
- Filing fees and yearly maintenance fees
- Could pay more taxes than if you were an S Corporation
Option 4: C Corporation
C-Corps are a lot more work to set up and maintain, but they also provide more protection. (I’m talking liabilities and debts here.)
And while LLCs are great for new or small businesses, being a corporation allows you much more room to grow as a company since it allows you to have shareholders from anywhere around the world.
A downside of this legal structure is that the taxes are more complex. You also may be subject to double taxation, depending on your situation. That means you would be required to pay taxes at a federal and state level as well as additionally taxed for the personal salary you take from the corporation. Yeah, not fun…
As a result, C Corporations aren’t a good fit for small businesses or freelancers. So chances are, this isn’t a good option for you.
Pros:
- Protects you from debts and liabilities
- Allows for unlimited shareholders, including internationally
Cons:
- Requires a lot more administrative work
- Taxes are more complex and may cost you more
- Inflexible
Option 5: S Corporation
Like I said before, an S-Corp is the legal structure I decided to use for my business. An S-Corp provides the same stable structure and legal protection that a C-Corp does, but it only has one level of taxation.
Another difference is that, with an S-Corp, you can only have up to 100 shareholders, and they must all be U.S. citizens. So it provides some room for growth without forcing you to morph into some huge company.
Because of that, an S-Corp can be perfect for new or small corporations.
Pros:
- Legal protections
- Allows for shareholders
Cons:
- Requires a lot of upkeep
- Limited to 100 shareholders, only U.S. citizens
- Not as flexible as an LLC
Use LegalZoom Set Up Your Legal Structure
If your mind was spinning as I described the various entities you could form for your business, then take a deep breath. It’s gonna be OK, trust me!
You can use a company like LegalZoom to set up your legal structure so you can rest easy (and pay less!).
I’ve used LegalZoom many times to set up different companies, including my consulting business. And I’ve never run into any problems with them.
They make the process so much easier as they hold your hand and walk you through each legal step. And on top of that, they’re quick to show you ways you can save money while setting up your legal structure.
Of course, if you join my Six-Figure Freelancer Facebook Group, you can ask fellow entrepreneurs about their experiences setting up their legal entity. Hearing from those who have gone before you is a great way to prepare!
Lastly, if you haven’t already downloaded my Six-Figure Freelancer Guide, make sure to do so now. You’ll 54 pages of value-packed tips, insights and strategies you can start implementing right away.
Best of luck as you begin this journey!
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