Last time, we took a look at two of the most common business structures for a freelance writing business: the sole proprietorship and the partnership. That post has had several comments, and there’s a good discussion going on about the merits of each of these structures. Feel free to read that post, and to jump in to the discussions if you’re so inclined.
My approach in that post, as well as this one, is to give you the big picture on the types of structures available to you in your freelance writing business, to point out some of the pros and cons, and let you sort it out for yourself. It’s not my desire (at least not in these posts) to make a recommendation to anyone, so don’t construe what I’ve written as advice. Think of it more as sorting through the details to give you some framework from which to make your own decisions.
Today, I want to look at corporations and LLCs.
Corporations
A corporation is a unique entity, legally separated from its owners. A corporation can enter into a contract, be taxed and even sued. A corporation is owned by shareholders. Shareholders elect a board of directors to make the day-to-day decisions of the corporation, and the corporation doesn’t dissolve when ownership changes hands.
For the freelance writing business, a corporation is very rarely a viable business model. Corporations have the advantage of being able to raise cash through the sale of stock, and while most freelance writing businesses could benefit from spending some money on marketing, most of us don’t have the kinds of cash flow concerns that warrant a sale of stock to fix. Corporations limit your liability for debts of the company, but the LLC is a much less complex way to limit your liability. In addition, incorporating can result in a higher tax burden, as the dividends the company pays to shareholders are not deductible. You can actually wind up being taxed twice for the same income under the corporate model.
I should probably at least briefly mention the S-Corp. The Subchapter S Corporation model attempts to alleviate this tax burden, but the requirements are usually so specific as to be difficult for a freelance writing business to meet.
Limited Liability Companies (LLC)
The LLC is a hybrid business structure. It gives you the limited liability of the corporation combined with the tax benefits and the flexibility of a partnership. In the LLC model, the business owners are members of the LLC. The LLC has a built-in duration, which can be continued when it expires. An LLC is possible only when the company meets two or fewer of the characteristics of a corporation, including:
- Limited liability to the extent of assets
- Continuity of life
- Centralization of management
- Free transferability of ownership interests
Forming an LLC can be a good business structure for a freelance writing business. The LLC lets you have limited liability for the company, so that if it tanks your personal finances don’t have to do the same. In addition, the LLC features pass-through taxes, saving you the double-taxation situation that can arise from forming a corporation. Finally, an LLC requires quite a bit less in the way of paperwork than the corporation.
So, what kind of business structure best fits your freelance writing business? That’s for you to decide. Corporations seem to be fairly rare in our world, as do partnerships. The real choice seems to be between sole proprietorship and the LLC, and there are many individualized factors that can tip the scales between the two.
@Bob: I hope you’ll go deeper (or provide suitable links) on what are some of the deciding factors when choosing either a sole proprietorship or LLC. For newcomers, a sole proprietorship is probably easiest: you won’t have to do anything. When your business takes off, you might consider an LLC.
Myself, without the legal protection of a corporate boss, the ability to protect your assets is a valuable reason for an LLC.
@Ed – Like I mentioned in the last post, I’m just trying to put out the bird’s-eye view here. I’d like to get into the SP vs. LLC question, and hopefully sooner rather than later. Next week, perhaps?
In general terms, you’re probably right: starting of as a SP and moving into an LLC when things get moving is the path most of us take, and it’s probably the most appropriate in most cases.
This is a great overview of outsourcing your writing, something I plan to do when I have enough funds. Thanks for this article!
Ed,
For a good discussion on SP vs LLC, go to SCORE (Service Corp of retired executives) who can talk at a person’s level (a lot of background in these matters or a little) at no charge. There should be a chapter at a local university.