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Freelancers: Understand your choices when doing business

Freelancers are in a somewhat unique position when it comes to deciding exactly what type of business they want to be.

No matter what type of freelance work you do, there are pros and cons to each type of business entity you can choose to operate under. While these aren't your only options, they are the three most common choices for new freelancers to use.

1. Sole proprietors are very common.

A sole proprietorship is probably the most common way for freelancers -- especially those just testing the waters to see if they're going to continue in the market -- to operate. Essentially, you are the business. It requires no paperwork on your part with the government and it's fairly easy to file your taxes.

  • The cons to operating as this type of entity is a big one -- it's the same as the benefit. There's no legal wall between "you the business" and "you the person." That means if you make a major mistake, your business creditors can go after your home, car and other assets.

2. Partnerships often involve spouses or friends.

A lot of freelancers go into business with their spouse -- in which case a partnership is often ideal. It's also the best thing to have if you go into business with your best friend or just one other person. You get to split the work -- and the taxes -- according to your desires.

  • A partnership has the same cons as a sole proprietorship -- only you're both risking the same things.

3. Limited liability companies are more complicated.

If you go into business with several people or you want the security that comes with having a legal wall between "you the person" and "you the business," consider forming a limited liability company (LLC).

  • They're not much more complicated than being a sole proprietorship but they do have more taxes and fees and the rights of each person involved may not always be clear.

You can also eventually move into a corporation of one type or another -- and there are several -- but they require much more complicated processes when it comes to taxation.

Whatever your choice, it pays to consult with a business law attorney about your freelance career from the start. It's the best way to protect yourself and your future.

Source: UpWork, "The 5 Business Entities Every Freelancer Should Know About," accessed Oct. 06, 2017

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