Differences Between Sole Proprietorship & Freelance

By Wayne Thomas

The freedom to control the process and method when working for another makes freelancing an enticing way to earn income. Those that choose this arrangement over conventional employment have some flexibility in determining how to structure their business, how to be paid, and how to handle profits and losses for income tax purposes.

Overview of Freelancing

A freelancer, also known as an independent contractor, is an individual who performs work for another while retaining control over the process and methods for completion of the project. The employer has limited control over the independent contractor beyond what is mutually agreed upon.

Overview of a Sole Proprietorship

A sole proprietorship is a type of business structure that is owned by a single individual. No formalities are required and the business is created the moment the individual starts operating. As such, the company and the owner are considered as one; therefore, any liabilities of the business become the liabilities of the owner. The same rationale is true for profits, with the owner retaining complete control over the management and operations of the business. Over time, sole proprietors can hire employees to handle work demand or engage the services of independent contractors, or some combination of both.

Ready to start your LLC? Start an LLC Online Now

Business Structure Options

A person engaging in work as a freelancer has a few options on how to operate, including remaining a sole proprietor or creating a business entity separate from the owner. Limited liability companies (LLCs) and corporations are two examples of separate business entities that effectively remove the owner from personal liability for most debts and legal obligations incurred by the business. Although it varies from state to state, formation of either of these business structures generally requires the selection of a business name and the filing of articles of incorporation with the state.

Tax Differences

Because a sole proprietor and the business are one, the owner must report any income earned on his personal tax return and pay self-employment taxes. However, the business is not required to file a separate return or pay additional taxes. If an independent contractor decides to form an LLC, the owner can elect to treat the company as a sole proprietorship or a corporation for tax purposes. A corporation is a separate tax-paying entity and is typically required to obtain a federal tax ID number. It is also subject to double taxation, meaning that taxes must be paid on income earned by the business and then again for any dividends paid out.

Ready to start your LLC? Start an LLC Online Now
Can a Sole Proprietor File as an S Corporation?


Related articles

Can You Fill Out a 2553 Before the Articles of Incorporation?

A business entity that wishes to become an S corporation must file Form 2553 with the IRS. However, before a business can submit this form, it must first qualify for S corporation status and must file articles of incorporation with the state to incorporate the business.

Why Open an LLC?

An LLC, or limited liability company, offers distinct advantages over other more traditional forms of doing business. For business owners, an LLC offers the advantages of limited liability in conjunction with the ability to elect how the entity will be taxed. Additionally, owners, known as members, of an LLC are not obligated to adhere to rigorous corporate formalities in the conduct of their business.

What Is the Difference Between a Solo Practice & a Sole Proprietorship?

Selecting the legal structure of a business is one of the first and most important decisions that a new business owner can make. It can dictate the number of owners in the business, the level of formality of the organization and has many important tax consequences. The simplest form of business is the sole proprietorship since it does not involve multiple owners, has simple tax treatment and does not require formal state filings prior to start-up like a corporation or limited liability company. Solo practices in various professions are not restricted to a specific form of business structure; the term solo practice simply indicates that there is a single professional in the practice.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Convert a Sole Proprietorship to a Partnership in Maryland

In many cases, a business gets off the ground with the work of a single owner operating a sole proprietorship. As the ...

Corporation vs. Officer vs. Owner

A business that operates as a corporation generally drafts bylaws – a document that governs all aspects of the company. ...

Similarities Between Sole Proprietorships and Partnerships

If you are interested in sending a message that you are willing to take personal responsibility for the success and ...

LLC Vs. S Corp Profit Sharing

A limited liability company, or LLC, and S corporation are both popular business structures that usually protect their ...

Browse by category
Ready to Begin? GET STARTED