PAYSTUBMAKR.COM presents the first part of the article about: What is better Sole Proprietorship or LLC
Traditional workers or employees are part of a company structure with a long history of exchanging working time, sweat and mental effort with money and other conditions like benefits that cover mainly health, vacation, and pension. The gig worker needs a different solution for the missing benefit coverage. Converting himself to legal
If you’re an on-demand, temporary, or gig economy worker, there’s an important decision you need to make — should you legally form a business for your work? There’s no one, simple answer, but we’ll give you the lowdown to help you make the right choice. Disclaimer: This is not be construed as legal or financial advice. Legal person
Why Should You Form a Business as a Gig Economy Worker?
If you’re working for yourself, you’re self-employed, which means you’re both an employer and an employee. In other words, you’re already a business. There’s some complexity and subtlety here though, which is, should you choose to form a different type of business?
There are some advantages and other disadvantages, depending on the type of business you choose to form. Let’s get into it.
What are gig economy options for legal entities creation?
There are several types of business that you can choose when you consider the US law and the IRS eyes:
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Sole proprietor — You own the business for good or for bad, you make your money only for yourself, and of course the IRS steak. You are a sole responsible for debts and damages. There is no need for a special bank account or bookkeeping.
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Partnership —If you do have a partner/s to your business, it will be the same as sole ownership for the legal finance and taxation issues.
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Legally Limited Company —called in short LLC, it is already a real company that can be used for small businesses as well as for bigger companies. It is a formal entity but yet easy to create. As its name tells, it is limited in the liability protection that the owners have.
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Corporation — this form of legal structure is used for big business. It must have more controls, so the administration is costly and more complicated.
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There are more options like Associations or Trusts that are not good for gig business workers.
Gig business is more personal and individual, mostly not a big volume, the Sole proprietor or the LLC are the two natural elections for the gig workers.
Sole Proprietor Business for the gig worker to create his legal structure
Forming a Sole Proprietor entity
You practically work for yourself as it is in the gig industry, you are a sole owner of your business from the moment you started to take jobs and do them on your own. The only thing you need to do is make it official by a notification of your situation to the IRS.
What Are the pros of a Sole Proprietor Business?
Comparing with the LLC to a sole proprietor. There are some advantages of using a sole proprietor instead of an LLC:
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There is no need to register on the state level or any fill documentation.
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There are no fees for forming a Sole owner business.
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You are free from file annual report or pay yearly fees.
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No bank account and bookkeeping for income and expenses.
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Taxation is simple
What Are the cons of a Sole Proprietor Business?
Some cont of the sole proprietor:
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Your business is you; you have a 100% of the business and so 100% of its liabilities. You do not have a legal persona as a business, it is always you, for good or bad. Your assets can be seized.
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You can have the bank or other financial businesses looking for your credit score as part of your business and not the other way around or consider both credits as with an LLC
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As a Sole owner, you are not able to transfer ownership of the business. It makes little difference to a small gig business. You may think about it if you will hit the pot a make a big business out of one man band like the gig businesses mostly are.
Sole Proprietor Taxation:
As I mention above, Sole Proprietor business organization is simple, and taxation is the calculation of income and expenses and paying taxes from the balance when filing your tax return.
You have to pay yourself payroll deducting the regular withholding as in the list:
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FICA – Medicare
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FICA – Social Security
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Federal Tax
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State Tax
Federal and State revenue taxes should be paid as estimated taxes four times a year and balanced at the filing of the end of the tax year. Though you are a small operation, you better have an accountant to advise you on taxes.
The liability on your debts is not a problem if you’re not going to do crazy things and take money to through in the air or to the sea. The dollars and cent that you can save on administration can help you grow bigger. Being lean and mean can make it for you unless you grow and start to hair people and put the equipment to work.
Your list of costs will be Business expenses, accountant fees and the taxes you have to pay.