When starting your own business, deciding on the type of business entity that you want to form is a crucial step of the process. You know you want to be self-employed, free to make a living on your own terms. Beyond that, you might have heard about being a sole proprietor. What is the difference between self-employed vs. sole proprietor?
The truth is that these two options are very similar with lots of crossover – and you may even be both at the same time.
Self-Employed
Self-employment simply means that you work completely for yourself. There are no upper levels of management to answer to and no one telling you what to do. It is more of an umbrella term that can cover several different types of business entities, including sole proprietors, LLCs partnerships, and even work as an independent contractor.
Under this self-employed label, you may find the freedom to hire help in the form of employees or independent contractors versus having to work completely solo – a major difference from a sole proprietor.
The benefits of being self-employed can include the freedom and flexibility to live life on your own terms. You have the freedom to be your own boss, but that also comes with some stress. It makes you dependent on the success of the business for your livelihood. Not to mention, you have to cope with extra business management such as tax filing while also missing out on benefits usually sponsored by your employer, such as retirement plans.
Sole Proprietor
If you are self-employed, you need to select a business entity that will cover your operations. For many, a sole proprietorship is the easiest way to go. It is a specific type of structure for your business that falls under the self-employed umbrella term.
The question is: when and why would you choose to become a sole proprietor when launching your new business?
First and foremost, many self-employed business owners choose a sole proprietorship because it is quick and easy to start. Unlike other entities, there are no registration requirements at the country or state level. You are completely free to launch your business whenever and however you see fit. This ease makes it more appealing than complicated structures that require lots of paperwork.
Taxes are also relatively simple for sole proprietors. They have pass-through taxation, meaning that you can file your business taxes as part of your personal tax return.
Unfortunately, there are also limitations to the sole proprietor title. It means that you work as a single individual. You might hire an independent contractor to perform work, but you cannot have any employees under this business structure.
Other Business Structures for the Self-Employed
Other than a sole proprietor, you might choose to file for a different type of business structure such as a partnership or an LLC. Both of these entities are still forms of self-employment but they may suit your business in a different way.
Partnership
A partnership is when two or more people enter into business together. They agree to manage the business jointly and will also share the profits jointly. This means that each party that is on the paperwork will have an equal say in the liabilities of the business as well. Much like a sole proprietor, taxes on the profit that you will be paid out are passed through to your personal taxes.
With a partnership in place, you can capitalize on the experience and skills of more than one person to get your budding business off the ground.
Limited Liability Company (LLC)
The other common type of self-employment is a limited liability company, often abbreviated as an LLC. This is a bit different than a sole proprietorship or a partnership as it offers its owners a layer of protection from personal responsibility for the liabilities or debts of the company. This is the major reason why someone may choose an LLC, but you may also choose this structure if you desire to hire employees.
That said, there is a degree of complication with starting an LLC. Where a sole proprietor can simply open the doors of their new business, an LLC must file with the appropriate regulating agency for their state.
However, taxes can be just as simple for LLC owners as they are for sole proprietors. When filing, you can elect for your LLC to file taxes as a corporation, partnership, or an individual. If you choose to be taxed as an individual, you will file the business taxes as part of your personal taxes at the end of the fiscal year.
To add another factor to the mix, an LLC can still be a sole owner business much like a sole proprietor. It can also represent a partnership. The major selling feature of the LLC is simply that it does not allow the business owner to face personal responsibility for the liabilities of the business. You should consider filing for an LLC to protect your personal assets in the event that the business fails to prevent creditors from claiming them.
Protect Your Future
No matter what business structure you decide on, it’s essential to protect your financial future. Unlike employer-sponsored benefits which are already set up, self-employed business owners have to set up their own insurance and retirement plans. The steps involved cause many hard-working business owners to delay the process – or never set one up at all.
Retire4one makes it easy for self-employed individuals to set up and manage a Solo(k). Through our system, you can access the benefits of a large employer plan regardless of the size of your new business. Choose from curated funds monitored by an independent fiduciary, or set it and forget it by selecting Target Date funds! – it’s up to you!
Best of all, we have the needs of busy business owners in mind. It takes just a few minutes to set up your plan through our website. Come tax time, we’ll file the tax form for your Solo(k). Get started now!