When you work for yourself, you fill two roles in one. The employee and the employer. In order to do this, you have to create a business entity that essentially hires you. It feels a little like make-believe play – All I want to do is my work! – but it is necessary. The two most common options are sole proprietor and limited liability company, or LLC.
It is the first decision that you need to make, because it determines your legal status and name options. And, you’ll be asked about it right away when registering your license.
Advantages: simplest and cheapest
Legal Name: must be your name
Disadvantage: liability – if someone sues your business, they are suing you
In this case, you and the business are considered one in the same. There’s no real structure to set up or maintain. You simply are required to have licenses and pay taxes. It is free. There are no additional obligations, and no special benefits. Except that the paperwork is the most streamlined.
There is a risk, though. If someone sues your business, they are suing you too. Meaning, if they win and you owe them money, it comes out of your personal accounts. In a worst case scenario, you’d have to sell your house or drain accounts to pay them.
You can do business under a different name, called your trade name, or DBA, Doing Business As. For example, Jane Doe’s legal business name would be Jane Doe. She could do business as, Polka Dot Consulting. She just has to register this name, so her business activity is traceable to her legal name. These only cost $5 each. When you apply for your license, you can choose 1 or more.
Advantages: protection from lawsuits, looks official
Legal Name: must include a version of LLC*
Disadvantage: it costs some money each year
In this case, the business is a company that is separate from you. It offers a layer of protection. If someone sues your company and wins, then they can take company assets (not your personal ones). In my case, this includes a small business savings account, my computer, printer, and lots of great books. The idea is that your home and personal monies are protected. Having said that, it is possible to get around that protection – depending on the case and the lawyer. If you want to know more on the subject, I suggest meeting with a small business lawyer to share more about your specific situation.
You must apply with the Secretary of State to be granted this entity. It costs about $200. And, you must renew each year on the anniversary month, for about $80.
The LLC also looks serious and cool. For people that don’t know, it helps you to look official. This can be a boon for certain types of business. You can also use DBAs. (But they may not include variations of LLC.)
Concerning the IRS – Good news!
A cool thing is that you don’t have to do anything different for the IRS! That is, if you are a single-member LLC. Because you are still a one-person business, and there’s no dividing of profit, the IRS lumps you in with Sole Proprietors. In fact, they refer to you as a “disregarded entity”. You are not regarded! You are ignored. This is great because it keeps your paperwork simple.
In the end, both serve different purposes. Often - people who are tight on cash, or starting before they're totally ready, or intimidated by the LLC – choose sole proprietor. For others who have the money, and/or are really committed to their vision, tend to go for the LLC! You even get a certificate with borders and a golden seal to frame.
Jenny Girl Friday
Girl Friday LLC
Jenny Girl Friday
*Limited Liability Company, Limited Liability Co., LLC, or L.L.C.