How Does an S Corp Help Me as a Freelancer?

Shout out to all the businesses-of-one!

We see you. And we know that as a solopreneur (aka “It’s just me working here!”) one difficult decision you’ve got to make–or perhaps you’ve been avoiding making–is choosing which business structure is right for you.

Lettuce has some insights to help you choose wisely

First, what are your options? Well, two of the most common business structures are Sole Proprietorship and S Corporation (S Corp). While both have their merits, understanding the differences and implications is crucial and can save you lots of money. Like, potentially Hawaiian-vacation-for-four money!

In this blog post, we will delve into the advantages, disadvantages, and key considerations of both sole proprietorship and S Corp structures. In a matter of minutes (it’s a quick read!), you'll have a much clearer understanding of which option could be best for your biz.

Sole Proprietorship

Think of a Sole Proprietorship as your business’ default settings. It’s the simplest, most common business structure and it will be how your business is legally recognized if you take no action to change it. With a sole prop (pardon the tax lingo), your business and you as owner are legally indistinguishable.

What else? Here are a few more key aspects of a sole proprietorship:

1. Liability: Unlimited! You are personally on the hook for any unpaid debts or legal claims/lawsuits brought against your business. In other words, sole props don’t shield your personal assets (home, car, bank accounts) from being used to pay off any manner of costs incurred by your business. 
2. Taxes: As a sole prop, instead of splitting the tax 50/50 with your employer, you pay the full 15.3% self-employment taxes (Social Security + Medicare) all by yourself! Never fear, S Corps to the rescue! 
3. Simplicity: You can easily establish and operate your business with minimal paperwork and legal formalities. 
4. Flexibility: You can use your personal assets for business purposes. NOTE: This lack of separation between personal and business finances can limit your liability protection.

S Corporation

On the other hand, think of an S Corporation (S Corp) as a distinct legal entity separate from its owner, which offers some real advantages vs a Sole Proprietorship, like:

1. Limited Liability Protection: With an S Corp, because your business finances and accounting are completely separate from your personal finances, your personal assets are generally safeguarded from business liabilities. This offers an added layer of protection–and peace of mind!
2. Tax Advantages: Unlike sole proprietorships, your income is divided into two parts: Salary and Owner’s Distribution. Should you care? YES! Why? Because only the salary portion of your income is subject to the 15.3% self-employment taxes. Your Owner’s Distribution portion is not taxed at all, typically saving you thousands of dollars (Aloha, anyone?)
3. Benefits: As the employee of your S Corp, you’re able to receive and offer yourself certain benefits, such as healthcare, retirement contributions, and deductible expenses–all of which reduce your tax liability and save you money.
4. Compliance & Formalities: S Corps have some additional administrative requirements compared to sole proprietorships, such as: filing articles of incorporation; holding regular meetings; and maintaining corporate bylaws. These obligations do entail some extra effort and potential costs–but that’s where Lettuce comes in! We take care of the requirements for you with just a few clicks. As for the added costs, they’re typically offset by the tax savings we generate.

Curious if an S Corp is right for you?

Try the Lettuce Tax Calculator to see how much more you can take home each year.

See your savings

How to Choose Wisely

Ultimately, you’ve got to decide how to structure your business. It’s a big decision, but with some guidance, it can be a more informed one. See below for our list of key considerations:

1. Liability Concerns: Forming an S Corp offers greater personal asset protection compared to a sole proprietorship.
2. Tax Implications: Estimate your business income, expenses, and growth projections to assess the potential tax advantages of an S Corp. Of course, you can consult with a tax professional to determine the most tax-efficient structure for your specific circumstances. But if you wanna know right now how much you could save in taxes, use our S Corp tax calculator to estimate how much an S Corp could save you.
3. Income Level: If you anticipate income above $100k, choosing an S Corp likely makes more sense given that the increased tax savings generated by an S Corp outweigh the additional costs = more money in your pocket!
4. Business Goals and Longevity:  Consider your growth plans and long-term objectives. If you anticipate substantial growth, the need to bring in partners and/or investment, or going public, an S Corp structure might be more suitable due to its scalability and attractiveness to investors.
5. Administrative Capacity: Determine whether you’re able to take on the additional administrative responsibilities that come with an S Corp, like maintaining corporate records, holding meetings, and complying with state and federal regulations.

What have we learned?

We love a list. So let’s take a look at a summary of key points:

1. Selecting the right business structure is a crucial decision that impacts various aspects of your operations, taxes, and liability protection.
2. Sole proprietorships may offer simplicity, but also require you to pay the full 15.3% self-employment tax on your net income.
3. S Corps provide liability protection and offer several potential tax advantages.
4. Because your business is unique, what works for one might not be the best fit for another.
5. Take the time to assess your business needs, consult with professionals, and make informed decisions that align with your long-term goals.

Thanks for reading. If you have more questions or just want to learn more about your options, the Lettuce blog has got you covered. See our article on Freelance vs Contract Work. 

Curious if an S Corp is right for you?

Try the Lettuce Tax Calculator to see how much more you can take home each year.

See your savings

Related Resources: 

• How to Be a Consultant 
• How Consulting Taxes Really Work