What structure is best for a freelancer?

For most freelancers starting out: a sole proprietorship is simplest. As income grows or risk increases, forming an LLC (single-member LLC taxed as sole proprietorship) provides liability protection without significant complexity. As income increases further, electing S-corp taxation can reduce self-employment tax. An LLC with two or more members is taxed as a partnership by default. C-corps are generally only appropriate for businesses planning significant outside investment or a public offering.

What is a single-member LLC?

A single-member LLC (SMLLC) is an LLC with one owner. For tax purposes, it's treated as a sole proprietorship by default — meaning all income and expenses flow through to the owner's personal tax return on Schedule C. Legally, it provides liability protection (separating personal assets from business debts). An SMLLC is one of the most common structures for independent freelancers and consultants.

How does an S-Corp help reduce self-employment tax?

An S-Corp allows you to pay yourself a reasonable salary (subject to FICA/SE tax) while taking additional distributions from business profits as non-passive income (not subject to SE tax). Example: Business profit = $150,000. As sole proprietor: all $150,000 subject to 15.3% SE tax. As S-Corp with $70,000 salary: only $70,000 subject to SE tax; the remaining $80,000 in distributions taxed at lower rates and not subject to SE tax — potentially saving $8,000-$12,000+ annually in taxes.

Business

What is Organizational Structure?

Organizational structure defines how a business is legally organized and structured — sole proprietorship, LLC, partnership, corporation. Learn how to choose the right structure for your freelance business, including tax and liability implications.

What Is Organizational Structure?

An organizational structure (more formally called a business entity structure or business legal structure) defines how a business is organized under the law — specifying ownership, management responsibilities, profit-sharing arrangements, liability exposure, and tax treatment. Choosing the right organizational structure is one of the most consequential decisions for any freelancer or small business owner. Schema DefinedTerm: Organizational structure — the legal form of a business entity (sole proprietorship, partnership, LLC, S-Corp, or C-Corp) that determines ownership rights, liability exposure, management obligations, and tax treatment; fundamental to business planning and risk management. The structure you choose affects how much you pay in taxes, whether your personal assets are at risk if the business is sued, how you can raise capital, and how much administrative paperwork you're required to maintain.

The Five Main Business Structures

1. Sole Proprietorship The simplest and most common structure for freelancers. Characteristics: - One individual owns and operates the business - No legal separation between you and the business - All business income is your personal income - You bear full personal liability for business debts and lawsuits - Simplest tax filing: Schedule C attached to Form 1040 Tax treatment: - Business income/loss flows through to personal return - Subject to self-employment tax (15.3% on net earnings) - No corporate-level tax When to use: Early-stage freelancers, consultants, and service providers with limited liability risk. 2. Partnership A business owned by two or more individuals or entities. Types: - General Partnership (GP): All partners share management, profits, and unlimited personal liability - Limited Partnership (LP): General partners manage and bear liability; limited partners invest but have no management role - Limited Liability Partnership (LLP): All partners have limited liability, common for professional services (lawyers, accountants) Tax treatment: - Partnership is a pass-through entity - Income/loss allocated to partners per partnership agreement - Partners report on Schedule K-1 - General partners pay SE tax on their share; limited partners typically do not 3. Limited Liability Company (LLC) A hybrid structure offering liability protection with flexible tax treatment. Characteristics: - Owners (called "members") have limited personal liability - LLC can be managed by members or by appointed managers - Profits and losses can be allocated differently from ownership percentages (within limits) Tax options: - Single-member LLC: Taxed as sole proprietorship (Schedule C) - Multi-member LLC: Default taxed as partnership (Form 1065), can elect S-corp or C-corp - LLC electing S-corp or C-corp: File Form 8832 to change tax classification Why freelancers love LLCs: - Liability protection without corporate formality - Flexible profit allocation - Can elect S-corp taxation to reduce SE tax 4. S Corporation A corporation that elects pass-through taxation under Subchapter S of the IRC. Requirements: - Domestic corporation only - Maximum 100 shareholders - Only individuals, estates, and certain trusts as shareholders - Only one class of stock - No non-resident alien shareholders Tax treatment: - Pass-through entity — income and losses flow to shareholders - Shareholders who work for the company must receive "reasonable compensation" (salary subject to FICA) - Profits distributed as dividends (not subject to SE tax) The salary + distribution strategy: - Pay yourself a reasonable salary (subject to FICA) - Take additional profits as distributions (not subject to SE tax) - Can save thousands in SE tax annually vs. sole proprietorship Downside: More paperwork than LLC, requires payroll, stricter requirements. 5. C Corporation The traditional corporation, taxed separately from owners. Characteristics: - Double taxation: corporation pays tax on profits; shareholders pay tax on dividends - No limit on shareholders or stock classes - Can have multiple classes of stock - Most complex structure and most expensive to maintain Tax treatment: - Corporate tax rate: 21% (flat rate post-TCJA) - Profits taxed at corporate level, then dividends taxed again at individual level - Attractive for businesses planning to reinvest profits, raise VC, or go public

Structure Comparison

| Structure | Liability | Tax Complexity | SE Tax | Best For | |---|---|---|---|---| | Sole Proprietorship | Unlimited personal | Low | Yes | Early freelancers, low risk | | Partnership | Unlimited (GP) / Limited (LP) | Medium | Yes (GP) | Multiple owners, professional services | | LLC | Limited | Low-Medium | Yes (default) | Most freelancers wanting liability protection | | S Corp | Limited | Medium-High | Partial | High-earning freelancers, consultants | | C Corp | Limited | High | No (via salary) | Startups seeking VC, businesses going public |

How to Choose

Key factors to consider: 1. Liability risk: Does your work expose you to lawsuits? Higher risk = prioritize liability protection (LLC or corporation) 2. Tax efficiency: How much are you earning? At higher incomes, S-corp election can significantly reduce SE tax 3. Administrative burden: How much paperwork can you handle? Sole proprietorship = minimal; S-corp = payroll required 4. Capital needs: Planning to raise investment? Investors typically prefer C-corps or LLCs with C-corp elections 5. State filing fees: LLC and corporation fees vary significantly by state — sometimes $800+/year just in state fees

Freelancer Example: Structure Evolution

Year 1-2 (Freelancing part-time, $30K income): → Sole proprietorship. Simple, low risk, minimal paperwork. Year 3 (Full-time, $80K income, some equipment/assets): → Form single-member LLC. Liability protection + simple tax filing. Year 4-5 ($150K+ income, wanting to reduce SE tax): → Elect S-corp taxation for the LLC. Pay yourself a salary ($70K) + distributions ($80K). Saves ~$12,000/year in SE tax. Year 6 (Raising VC funding): → Convert to C-corporation for investor requirements.

How Eonebill Helps

Eonebill helps you track business income and expenses in a way that works regardless of your structure. As your business evolves and your structure becomes more complex, maintaining clean financial records is essential for tax compliance and entity management. Consult a CPA and business attorney when making entity structure decisions.

Related Terms

- LLC — limited liability company details - S-Corp — S corporation taxation - Sole Proprietorship — single-owner business

Related Templates

- Business Structure Decision Guide - LLC Formation Checklist

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Key Takeaways

An organizational structure (or business entity structure) defines how a business is legally organized — including who owns it, how profits and losses are distributed, how it's taxed, and who bears personal liability for business debts.

The five main US business structures are: (1) Sole Proprietorship — one person, no legal separation from business; (2) Partnership — two or more people; (3) LLC (Limited Liability Company) — hybrid offering liability protection with pass-through taxation; (4) S Corporation — corporation with pass-through taxation, limited to 100 shareholders; (5) C Corporation — traditional corporation taxed separately from owners, subject to double taxation.

For most freelancers starting out: a sole proprietorship is simplest.