We receive advertising fees from the brands we review that affect the ranking and scoring of such brands.
Advertiser Disclosure

When and Why Freelancers Should Create a Formal Business Structure

Published: July 19, 2024
BS

Bradley Schnitzer
freelancers formal business structure

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end. Use what you learn to decide whether the change will simplify your daily work.

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

Our top picks for September 2026

Why Should I Create a Business Structure My Freelance Business?

A formal business structure offers many legal protections and other benefits that can help you grow your business with less worry.

Most small businesses and freelancers set up a business structure to save on taxes and protect their assets.

1. Liability Protection

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

Let’s look at an example.

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

But with a business structure in place, your house and car would be safe. Only business assets — such as savings accounts and equipment — would be at risk of loss.

man looking over documents

What About Liability Insurance?

Liability insurance doesn’t protect your assets from being used to fulfill financial obligations. Instead, it covers some of your legal costs when sued.

For that reason, a business structure is generally preferable.

Ideally, you’d have both — especially if you’re in an industry that’s known for liability claims. With that said, form a business structure first to protect your personal assets.

Piercing the Corporate Veil

As a freelancer, it’s easy and often tempting to mix your business earnings and expenses with your personal finances.

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility.Quickbooks to simplify your record keeping and separate business and personal funds.

2. Tax Benefits

Both freelancers and W2 employees pay personal income taxes. However, freelancers pay double the FICA (Social Security and Medicare) taxes.

See, employees and employers split FICA taxes. But since you’re self-employed, you’re responsible for both.

Certain business structures help you reduce your self-employment taxes. These structures have more complex requirements and paperwork, though.

3. Credibility

The benefits of a business structure go beyond legal concerns.

Adding a corporate title such as “LLC”, “Inc.”, or “Corp” after your name conveys credibility and professionalism to current and prospective clients.

Ultimately, clients pick you based on your past work and your sales pitch. But having a formal business structure in place sets you apart from freelancers without one.

4. Raising Capital

The credibility factor extends to business borrowing. Banks are more likely to trust a formally structured business than a sole freelancer without a business structure.

two employees working

Types of Business Structures

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

If you want to formally structure your freelance business, you have two viable options.

1. LLCs: Simplicity and Liability Protection

The LLC — used quite often for independent businesses — is the simplest formal business structure for freelancers.

Taxes work the same way as with a sole proprietorship if it’s just you. If you expand into a partnership by adding more owners, you only pay taxes in proportion to your ownership stake.

For example, if you and John Doe each own 50% of an LLC, you’d each pay taxes on 50% of the income.

In terms of liability, an LLC shields your personal assets from loss in case you’re sued.

2. S-Corporation: More Savings, More Paperwork

S-corporation is a special tax status you can elect if you’re an LLC. As an S-corp, you can become an “employee” of your business and pay yourself a “reasonable salary” as the IRS defines.

In doing so, you pay employee and employer FICA taxes only on your salary. You can take the rest of your earnings as distributions, which aren’t subject to FICA.

S-corporations have more paperwork and strict requirements, though. If you don’t meet them, the IRS may remove your S-corporation status and tax you as an LLC.

When to Create a Structure For Your Freelance Business

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

Once you take freelancing full-time, you should consider creating your LLC or S-Corporation. If it’s your sole or primary income stream, you want to protect yourself and it as much as possible.

Choose a process that suits the size of your team and the way your business operates. Keep records consistent, review them regularly and give each person a clear responsibility. When evaluating a new tool, work through a realistic example from beginning to end.

Ultimately, you should discuss this issue with an attorney.

Our top picks for September 2026

Liked this article?

Join the discussion

Comments are reviewed before publication.

BS

Bradley Schnitzer
Bradley Schnitzer helps businesses gain loyal customers through informative content pieces and persuasive copy. He is passionate about personal finance and helping budding freelancers further their careers.