Have your entrepreneurial inspirations motivated you to run a business? If so, you’re probably trying to decide whether to take up or work with a self-employed person. But believe it or not, these two are not the same. Instead, their business models work differently in several key ways, dramatically impacting how you run your business.
If you’re stuck in determining the best option at startup, this guide is for you!
What does it mean to be self-employed or entrepreneur?
In business, two of the most common interchanged terms are “self-employed” and “business owner.” The difference between these concepts depends more on the application than on the meaning. Technically, as an entrepreneur you are also self-employed. But not everyone who is self-employed owns a business – confused already?
Essentially, you are a small business owner if you hire employees or independent contractors to help run your business. On the other hand, if you are your own boss, you are self-employed.
Those who own companies choose an entity formation to incorporate, such as a limited liability company (LLC). In this step it becomes clear how a self-employed person does not go through this process because he acts as a sole proprietor. All related business management tasks, risks, rewards, revenues and taxes go directly through them.
Advantages and Disadvantages of Being an LLC or Sole Proprietorship
Any entity formation you choose to run a business has advantages and disadvantages. To get a better idea of what to sign up for when choosing an LLC or sole proprietorship, here are some of the pros and cons:
Advantages and disadvantages of a sole proprietorship
You immediately benefit from minimal start-up costs when starting up a business as a sole proprietor. Typically, there are no filing fees, annual reporting requirements, operating agreements, or hiring a registered agent. In addition to a low initial investment, the income is reported on your personal tax return.
With these budget-friendly benefits, there are also some serious risks. For example, your personal assets could be on the chopping block if you fall behind on your debts because your company can’t pay them. This also applies if someone is injured because of your services or products and decides to sue you for personal injury. It is also challenging to obtain financing for a sole proprietorship as you cannot share the ownership interest. Lenders may view your business as a high-risk investment and say no.
Pros and Cons of an LLC
One of the most popular reasons small business owners rely on an LLC structure is to protect their personal assets from business-related liabilities. The potential tax savings also cannot be ignored as there are several types of limited liability formations to choose from. You can file a declaration as a partnership, sole proprietorship, S or C company and more!
As unbelievable as this sounds, the startup costs can get pricey depending on your state you’re in. The State Secretary owes a renewal tax every year. In addition, you must hire someone to act as your registered agent. Entrepreneurs with limited resources may find this challenging to afford. In addition to incorporation costs, LLCs sometimes have to pay additional local and state taxes.
Cost of Forming Your Business as an LLC or Sole Proprietorship
A sole proprietorship is the standard entity structure for anyone running a business. Notification is not necessary as this is done automatically. For example, you are a sole proprietor when you accept payment and ship that product or wash a customer’s fence under high pressure.
Those who choose to form an LLC model immediately will pay all required state registration fees, including the cost of all required licenses and operating permits. In addition, most states require limited liability companies to file an operating agreement and articles of incorporation. These documents describe how your company is managed, by whom and what ownership interest all members have.
The cost of setting up an LLC varies by state, with some starting as low as $100. However, you must also remain compliant and submit an annual report to your Secretary of State to maintain a good reputation.
Self-employed people never worry about this extra responsibility because they are the only owner of their company.
What Liability Insurance Do LLCs and Independent Businesses Need?
One thing that both LLCs and sole proprietorships must always have is insurance! Without it, the consequences of expensive lawsuits, business interruptions and dangerous climate events can financially devastate your business. A comprehensive business owner policy can address many of your business’s day-to-day risks.
Not sure which options to choose when creating a BOP? Below are the four most commonly purchased commercial insurance policies and how they protect your business:
One of the most important coverages you can get for your business is general liability coverage. It protects your business against a wide variety of claims that can include:
Property damage Personal injury Libel claims Copyright infringement Intellectual property theft
This coverage only applies to claims from third parties and not to those of your employees. If you have a complaint from a customer or other company for any of the above, your policy will cover the costs of defending your claim and the claims settlement ordered.
A professional indemnity policy, also known as Error and Omission (E&) coverage, covers claims against your company for alleged financial losses. This insurance protects a variety of professional services, including accountants, lawyers, doctors and more.
Some of the common scenarios where you’ll need this coverage include:
Negligence (deliberate damage done to a third party) Financial loss caused by your services/advice Errors and omissions you make Failure to perform the services you have agreed to perform
Business Owners Policy (BOP)
This policy is a bundle of several covers in one. Many companies choose this insurance to provide the most comprehensive liability protection. Often, these packages offer a better price than purchasing each coverage separately.
Standard BOP packages often include many of the following:
General Liability Business Interruption Commercial Real Estate Professional Liability Commercial Car Workers Compensation Cyber Protection Rental and Non-Owned Car
Commercial insurance for the self-employed can provide an effective defense against liability situations that threaten your financial stability. LLCs should also take insurance seriously as their corporate structure only prevents personal assets from being used to settle claims.
Who’s the Winner: LLCs or Self-Employed?
Believe it or not, both can be when you just opened up for business. A sole proprietorship gives you a lot more flexibility and control over how you run your business in the beginning. You don’t have high start-up costs related to paperwork or registration, so you can focus on growth.
An LLC model is an excellent option if you are ready to expand and add more members to your entity. The cost is relatively low to set up compared to corporations and partnerships, and you still get significant tax benefits. Plus, your personal assets are separate from your business, so you never have to worry about creditors coming after your private check.
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was original published at “https://www.noobpreneur.com/2022/04/22/business-owner-vs-self-employed-which-is-right-for-you/”