Selecting the Right Solo Structure
Making your business official is one of the first steps to solo success.
As you begin the shift to self-employment, you will have a whole host of to-dos in order to service clients or run your operations. Likely, much of this will revolve around finding clients. It could be setting up a website, buying advertising, marketing, and all that fun stuff that may or may not prove useful. From a financial perspective, though, one area you need to make time for is your business structure because it can pay off in the long run.
For the self-employed or sole proprietors, how you set up your business can have very different impacts on how much oversight you face, what strategies you have at your disposal to save on taxes or what tools you can launch to secure your wealth. On top of all that, it’s also about how much liability you might have if something happens in the business. (I.E.: Lawsuits are bad for business, especially if it can also involve your house.)
As we plunge ahead with steps to shift to solo employment, here’s a quick rundown of the various structures you can pick from. You’ve probably heard of these names, but this might provide you with detail in why you might select one over the other:
Sole Proprietorship: This form of ownership is how the IRS will view you, whether you officially register as a sole proprietorship or not. It’s the default business structure. While this provides you with the ability to function as a business, it doesn’t give you much in terms of protection or tax strategies. In essence, you’re at the whim of your revenues. While it’s fine to operate like this in the first few months as a self-employed person, be sure to shift from it as soon as possible, unless you prefer no protection and more taxes of course.
Limited Liability Company (LLC): Everyone’s favorite structure, I think because it rolls off the tongue so well. But, in reality, it operates almost exactly like a sole proprietorship when you’re a one-person business. It, however, also highlights the value of making such a move to corporatize. With the LLC, you get some liability protection. More importantly, you can obtain a business number with the IRS, open bank and credit card accounts under your business name, and start a solo 401k. Also, with this structure, you can look like an S-Corp in the eyes of the IRS, while still operating as an LLC. It’s a nice bonus while your actual paperwork is kept to a minimum.
S-Corp: Under an S-Corp design, you will have a bit more paperwork to take care of. You’ll want a lawyer to handle this process, but there are financial benefits to it. Essentially, as an S-Corp, you’re both the employer and employee. This gives you a chance to pay yourself a salary and then receive profits from the business as dividends. This can save you thousands of dollars from self-employment taxes. The LLC gives you the capability to tap into this as well, but the S-Corp is particularly useful if you expect the business to grow to a size that will require more employees or eventually something you can pass down to your children or heirs.
These three designs are the most prominent in solo businesses, since a traditional C-Corp design would be too complex and partnerships involve more than one person. But with one of these designs - particularly LLC or S-Corp - you can begin to get your business off the ground and running. At the beginning, that’s really what you want. As you grow, you can adapt based on how your business takes shape.
If you already have a business, what structure did you choose and why? I personally prefer an LLC design with what’s called an S-Corp opt-in. I explain the process here.
Some extra Solo links:
Trying to decide between a solo 401k or SEP-IRA? Here’s a good rundown. (SmartAsset)
Building a side-gig that you hope turns into a full-time business? Watch out for these tax mistakes you might make from that income. (Seattle Times)
Having an issue with budgeting? Use this budgeting question to determine what spending you need and what you can dump. (Thinking Cap)