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Starting Self Employment:

Plan > Prepare > Launch


Step-3: Launch

Now that you have completed detailed planning and preparation to start your self-employment, it’s time to legalize this as a business. These will allow you to operate as a legitimate business in the eyes of local and federal Government.

  • Setting up the business
You will need to decide a legal structure for your business, i.e., whether you want to work as an individual or as an incorporated company. I have tried both at different times. Each has its own pros and cons. Assuming that you are an one-person business, here are a few options to consider.
  1. Sole Proprietor:
    • You will operate as yourself or you can have a DBA (Doing Business As) name assigned.

    • Customers will hire you as an individual on what is known as a 1099 contract. The 1099 refers to the IRS form that the customer will submit to IRS (and a copy to you) to report the amount they have paid to you during the fiscal year.

    • The form will have your Social Security Number as the tax identifier.

    • You will report all your business income from different customers on your personal income tax return.

    • You will be able to deduct IRS allowed business expenses from your taxable income.

    • You are personally responsible for any liability from your business. What that means is that if a court rules against you on a liability case (say from an unhappy customer) then they can recover the damages from your personal assets.

    • Note that you can purchase business liability insurance that can help you cover whole or part of such liability damages.


Pros
Cons
  • Least amount of effort to start the business
  • Minimum legal paperwork
  • No separate tax filing for the business
  • No separation between your personal and business identities
  • Business liabilities can impact your personal financial
  • The perception of a one-person business. (This can be a good thing for some)
  1. S-Corporation:

    • You will operate as a business with a formal name such as You Inc. or ABC Corp.

    • You will need to incorporate your business with your state's registration department and obtain an ID

    • You will need to register with IRS and obtain an Employer Identification Number (EIN)

    • Customers will hire your business for the services. You will represent your business.

    • You will submit a W-9 form to customers with your business tax information.

    • You will have to file a separate income tax return for the business; but no separate income tax payments.

    • Your personal tax return will reflect the profit/loss from the business (pass through taxation)

    • Issuance of shares is limited to a defined number of shareholders.


Pros
Cons
  • Business liability will be limited to the business only and won't affect your personal assets
  • Perception of a larger business
  • Ability to grow beyond one person
  • More effort to start the business
  • Decent amount of legal paperwork to start and maintain the business
  • Separate tax filing for the business
  1. Limited Liability Corporation (LLC):

    • A hybrid structure that offers the benefits of an incorporated company with less paperwork.

    • You still need to incorporate with the state registrar; but need less paperwork.

    • Note that IRS doesn't recognize LLC as a business entity type for taxation purposes. You will need to register either as a sole-proprietor or a S-Corporation.

    • Customers will hire your business and you will represent your business.

    • If you registered as a S-Corp with IRS then you will submit a separate business income tax return. You still don't have to pay any separate income taxes for your business.

    • Profit/loss from your business will pass-through to you, and you will need to reflect that on your personal tax return.


Pros
Cons
  • Business liability will be limited to the business only and won't affect your personal assets
  • Perception of a larger business
  • Relatively less effort to start the business (compared to incorporating as a S-Corp)
  • Less amount of legal paperwork to start and maintain

My suggestion is if you are planning to fly solo for foreseeable future then go for the Sole Proprietorship. It's less hassle. But if you want to grow by hiring employees than incorporate. Keep in mind that most major companies now require even incorporated companies to carry liability insurance.

In one of my earlier stints I was on 1099. But I have now incorporated as a LLC.

If you decide to incorporate then speak with a business attorney who can take care of the registration process for you. This will cost you anywhere from $1000 and upwards depending on the range of service. Or you can do it yourself using one of those self-service websites. The top two companies offering this service are – Legal Zoom and Incorporate.com. This will be much cheaper (a few hundred). I have used Legal Zoom before, and it was an easy process.
  • Self Employment Registration:

Most counties and cities require that you register as self-employed and obtain a business license. Check your county/city website for whether you need such a license and how to apply for one.

When you do that I will really appreciate if you can post your finding on this website. That will really help other self-employment aspirants from your region. Just email me the details and I will post it with the thanks and acknowledgment to you.

If you plan to use your residence as the business address then:
    • You need to check your city/county zoning law to ensure that you are allowed to run a business from your home.

    • If you are renting then you will need to get permission from your leasing company.

    • If you are in a residential community managed by a Home-owners' association then you may want to check if you need their permission.





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