Sole Proprietorships with Independent Contractors

By Jeffry Olson, J.D.

Sole Proprietorships with Independent Contractors

By Jeffry Olson, J.D.

Independent contractors allow sole proprietorships to operate with fewer or even no employees. Often, they allow a sole proprietor to work fewer hours and earn greater profits. They bring both advantages and disadvantages, so be sure to consider your options before choosing to operate your business with independent contractors.

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Advantages to using independent contractors.

Independent contractors bring many of the advantages of employees without some of the disadvantages. In general, independent contractors allow sole proprietors to produce more and make greater profits. They can reduce the hours a sole proprietor must work.

Another advantage is that independent contractors are not employees, allowing for greater flexibility. If a sole proprietor needs short-term help, independent contractors can fill an immediate need. This allows the sole proprietorship to maximize short-term profit while minimizing the long-term risks associated with taking on full-time or even part-time employees.

A sole proprietorship can use independent contractors for the term of the contract without any further obligation. If the sole proprietor no longer needs the independent contractor, the sole proprietor is under no obligation to extend the contract. This also allows a sole proprietor to try out potential employees. If an independent contractor does a good job and fills a need, the sole proprietorship can offer the individual a permanent position.

Using independent contractors allows the sole proprietor to avoid paying benefits, including health insurance, retirement, and vacation. Many jurisdictions and some unions require employers to offer employees certain pay and benefits. Independent contractors do not expect the same benefits.

Risks of using independent contractors.

The first risk to using independent contractors is making sure they are actually independent contractors. Many independent contractors have sued employers, arguing they are actually employees and are therefore entitled to protections and benefits afforded employees. Consider your expectations of independent contractors, including their own flexibility, not just yours. Limiting an independent contractor's ability to work for other employers may result in them being viewed as employees.

Liability for the actions of independent contractors presents another risk for sole proprietorships. Any liability arising from the actions of an independent contractor while they work for the sole proprietorship may be attributed to the sole proprietor. Simply arguing that they are an independent contractor is not a sufficient defense when it comes to potential liability.

Independent contractors are less inclined to be loyal to a sole proprietor than an employee. Just as the sole proprietor has flexibility when using an independent contractor, they have flexibility when choosing clients. If another company offers more pay, more hours, or better working conditions, it is easy for an independent contract to work for someone else instead of you.

Independent contractors allow sole proprietorships to get though more work and be more profitable while eliminating or reducing the need for permanent employees. They allow for flexibility, avoiding future obligations, and eliminate the need to provide benefits such as health insurance. Independent contractors also bring risks, such as being viewed as employees, potential liability, and a lack of loyalty. Sole proprietorships must consider the benefits and risks before using independent contractors.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.