In addition, you might be responsible for business licenses, depending on your location and type of business.Īs a sole proprietor, you will report your income and losses on your personal tax return, and the IRS does not require a separate tax return for your business. However, if you want to offer your services under a name that is different than your own, you might need to file for a fictitious business name or doing business as (DBA) with your state. You do not file any paperwork with the state to become a sole proprietor. Typically, if you have a partner you do not have a sole proprietorship, but some states make an exception to this rule if your partner is your spouse. As soon as you begin operating your business on your own the government considers you a sole proprietor. Further, some states impose additional taxes on certain entities.Ī sole proprietorship is the simplest business structure to form. Instead, the business income "passes through" to the owners, who pay the tax on their personal tax returns. Some business types enjoy "pass-through taxation," which means that the entity does not pay corporate tax. Taxes: Business owners must report income from their businesses to the IRS and state tax departments, and each entity has its own reporting requirements.Limited liability: When a business has limited liability, the owners' personal assets like their cars and bank accounts will not be on the line to satisfy the debts and obligations of the business.
Ongoing legal requirements: Some business structures need to satisfy repeating legal requirements, such as holding meetings, keeping records, and filing annual reports with government agencies.For other business types, the state requires you to file paperwork to officially form the business. Formation: You can form some business entities by simply conducting business.The major differences among business structures include: What is a Business Structure?īusiness structures, also known as business entities, are the legal names that describe how the owners legally form and operate the business. Whichever term you use, as an independent contractor you are self-employed, meaning you are the one responsible for legal and financial decisions like deciding on a business structure.
This includes freelancers, gig workers, consultants, and other business owners. Some business entities are easier to set up and operate, while others offer limited liability and tax benefits.Īn independent contractor is a broad term that describes anyone who provides goods or services without being employed by someone else. Each business structure (from being a sole proprietor to creating a corporation) has its pros and cons, and your decision will depend on your industry and interests.
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Whether you are a new independent contractor who is just starting out with your business or are looking to change your business structure for legal or financial reasons, an important step is deciding on how to structure your business.
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