Starting as a freelancer, I am not completely sure which is the right move, in regards to registering myself.
i) Registering my business as a Sole Proprietor is more economic at the start but has some legal concerns when it comes to liabilities and paying debts.
ii) Registering my business as a corporation has less personal risk (i.e. the business and owner are considered two separate entities), but cost more for start-up/registration.
Does anybody have any experiences or advice they can share on this subject? I have been reading a posts about the Pros and Cons but I am still undecided.
As you pointed out, the big difference is liability.
With a sole proprietorship, partnership, DBA there is no distiction between you and the business. So, if someone sues you, they can go after any assets you own. Also, from what I’ve heard, it’s more difficult to get bank loans as an individual than a company. However, these days the bar is set pretty low for starting a business selling digital goods, so that might not be an issue. A proprietorship/partnership tends to be the easiest type of business to set up.
Setting up and LLC is a bit more complicated. With a LLC, if someone sues you, they can only go after the assets the company owns and (typically) can’t go after your personal assets. The bookkeeping for an LLC tends to be a bit more complex, as there are certain regulations and tax laws that you have to comply with. There are typically two different types of LLCs: C-corporations and S-corporations, and depending on what your goals/needs/requirements are, each has benefits, drawbacks, and specific rules that need to be followed.
Actually, there are three types of corporations: LLC, C-Corporations and S-Corporations.
The LLC and S-Corp are both pass-through tax entities, meaning that the IRS (assuming you’re in the States) doesn’t recognize you and your business as separate entities. So you are taxed on your personal tax return for all profit the business reports. Likewise, if the business loses money rather than makes it, you can claim the loss on your personal tax return.
The C-Corp is a separate entity tax-wise. Than means the Corporation pay taxes on profit or can write off loss. The only tax you pay is on any salary or dividends you collected from the C-Corp.
All three protect your personal assets in the event of being sued, except in cases of outright fraud or negligence, in which case the legal system can pierce the corporate veil and personally hold the board of directors liable for damages.
Credit-wise, even if you are a C-Corp, chances are good that a lender will require you to be personally liable for any debt incurred, should the company default. Because one way or another, they’ll want their money.
The LLC is by far the easiest type to set up and maintain. That’s because the requirements over minutes and board meetings to maintain your corporate status are less strict for the LLC.
Thanks for your advice. I am actually in Canada, and there are a few differences, but your information is useful as well. I would prefer to err on the safe side, and go with the liability protection of a corporate status, but at this point I am too small. I have also heard that the start-up costs for registering as a corporate entity are much more expensive than as a Sole Proprietor.
Thank you for the article, John, I am just checking it out now.
That was a good article, Some of the tax information is similar to Canada’s however I am sure there are differences in liability issues. I have to do more research in that respect.