The vast majority of self-employed workers are sole proprietors, but there may be benefits to changing the legal form of your business. Let's go over why you may want to consider changing to a Limited Liability Corporation and how to form an LLC.
A Limited Liability Corporation is a business structure that is often described as a hybrid between a corporation and a sole proprietorship. This is because it provides the pass-through income taxation of a sole proprietorship or partnership with the limited liability of a corporation. You may also choose to have an LLC taxed as a corporation.
One of the reasons most self-employed workers are sole proprietors is that it's by far the easiest thing to do. You and your business are seen as one entity by the IRS, and there are few forms to fill out. Starting an LLC adds complexity and costs, but it can also have benefits. As the name implies, an LLC provides "limited liability" for its owners. Your personal assets can be protected against court rulings, debts or losses of your business. That's not always the case if you're a sole proprietor. If your LLC has one member, it's treated as a sole proprietorship for tax purposes by default. Those with more than one member are treated as a partnership. An LLC offers flexibility, though, as you can choose to have it taxed as a corporation. Having this option may be useful depending on how much income your business is making. Depending on your situation, there may also be other benefits of an LLC like increased credibility, state tax advantages or for business banking. There are potential negatives though, so be sure to consult your tax professional before making any changes.
If you've decided to create an LLC, here are the steps you need to take.
If any of you have changed from a sole proprietor to an LLC, please share your experiences with this process in the comments.