Self-employment refers to a person who works for him or herself. The most common types of self-employed businesses are independent contractors, sole proprietorships, partnerships, S corporations, and Limited Liability Companies. It is common in small businesses, especially during the Covid-19 period.
Self-employment can be a great way to start your own business and achieve financial independence. It offers many benefits, but it is important to understand the risks and challenges involved before you make the decision to become self-employed.
Table of Contents
1. Independent Contractors
An independent contractor is self-employed and contracts to do a specific job for another party. The contractor controls how the work is done but does not control who the customer is or what the product or service will be. An example of an independent contractor would be a plumber who contracts with a homeowner to fix a leaky faucet.
The contractor is responsible for their own business expenses, such as advertising, tools, and transportation. They also pay their own income taxes. There is no limit to the number of independent contractors an individual can have.
2. Sole Proprietorships
A sole proprietorship is a business owned by one person. The owner is responsible for all the debts and profits of the business. There is no limit to the number of employees a sole proprietorship can have.
The owner of a sole proprietorship typically uses their own name as the business name. This type of business is easy to set up and there are no special licenses or permits required.
3. Partnerships
A partnership is a business owned by two or more people. Each partner is responsible for the debts and profits of the business. There is no limit to the number of employees a partnership can have.
Partnerships can be general partnerships or limited partnerships. In a general partnership, each partner has unlimited liability. This means that each partner is responsible for the debts and profits of the business. In a limited partnership, there is at least one general partner who has unlimited liability and at least one limited partner who does not have unlimited liability.
Limited partners are not responsible for the debts and liabilities of the business beyond the amount of their investment.
Partnerships must file a partnership agreement with the state. This document spells out the rights and responsibilities of the partners.
4. S Corporations
An S corporation is a corporation that has elected Subchapter S tax treatment. This means that the corporation pays income taxes on its profits, but the shareholders (owners) of the corporation pay income taxes on their share of the profits.
An S corporation has limited liability just like a regular corporation. This means that the shareholders are not responsible for the debts and liabilities of the business beyond the amount of their investment.
An S corporation can have an unlimited number of shareholders, but can only have one class of stock.
5. Limited Liability Companies (LLCs)
A Limited Liability Company (LLC) is a business structure that provides limited liability protection to its owners. An LLC is formed by filing Articles of Organization with the state.
An LLC can have an unlimited number of members, and there is no limit to the amount of money it can raise.
An LLC does not have to file a partnership agreement or an operating agreement, but it is a good idea to do so. This document will spell out the rights and responsibilities of the members.
Final Thought
There are a variety of self-employed businesses, including:
- Home-based businesses
- Retail businesses
- Service businesses
- Internet businesses
- Consulting businesses
- Professional practices (lawyers, accountants, etc.)
Self-employed businesses have many benefits, including:
- The ability to be your own boss
- Flexibility in hours and work location
- The ability to earn more money than you would working for someone else
There are also some challenges associated with self-employment, including:
- The need to wear many hats (marketing, bookkeeping, customer service, etc.)
- The need to cover all business expenses out of pocket
- The risk of not making enough money to cover expenses
Each of these types of businesses has its own unique set of pros and cons. It is important to research the type of business you are interested in before making any decisions. You can do this by talking to other self-employed business owners and getting their advice.
When starting a self-employed business, it is important to create a business plan. This document will outline your business goals and strategies for achieving them. A business plan is a valuable tool for any business, whether self-employed or not.
