Navigating Independent Contractors and Companies: A Comprehensive Guide for Self-Employed Professionals

Starting a career as an independent contractor can offer a great deal of flexibility and freedom. However, it's vital to understand the legal and financial implications of this path. In this article, we will explore the benefits, procedures, and tax implications of being an independent contractor, compared to setting up a company such as an LLC (Limited Liability Company).

Can Someone Be an Independent Contractor and Have Their Own Company?

The concept of being an independent contractor can be intriguing for those who want to work for themselves but may not want to take on the full responsibilities of running a company. Here's what you need to know:

Firstly, if you are starting out and anticipate making under a certain amount (let's say around $100,000), you might think about registering under an LLC. However, the truth is that it is much easier to simply set aside money for taxes and not create a separate company. This doesn't change anything in terms of your status as an independent contractor.

Even if you register under an LLC, you won't receive a special company number. Instead, you will continue to use your Social Security number for all purposes, including tax reporting. The main advantage of an LLC is better financial tracking and potential personal liability protection.

Unless you plan on having employees, it might not be necessary to form a company. If you do plan to hire employees, you should definitely register under an LLC. Your state will provide specific guidance on the requirements and registration fees. In my state, it only cost me $50 to register, and I did it myself online by filling out a form and paying the fee.

There are various services available to help you with this process, but it is important to understand the legal and financial ramifications before making any decisions.

Depends on the Tax Setup

Another aspect to consider is the tax setup. An independent contractor can be self-employed and still hire people. For example, a family member started as a self-employed worker who required heavy training and both federal and state certifications. The people working for him were covered by his certifications. This highlights the complexity of tax and legal structures and the importance of proper planning.

When you function as an independent contractor, you can essentially create a corporation or a partnership with other people as your business grows. This is actually the way most companies are formed and grow. A person realizes there is nothing stopping them from being a company except taking on the responsibility of making all the decisions related to how they make a living.

Conclusion

Being an independent contractor can be a liberating experience, allowing you to work for yourself and make significant amounts of money. However, it is crucial to understand the legal and financial implications of this path. Whether you choose to form a company or not, being an independent contractor means you are a business owner. You are responsible for making decisions about your work, managing your income, and paying your taxes.

Regardless of your decision, it's important to stay informed about the latest laws and regulations that impact independent contractors and to seek professional advice when needed. Understanding the differences between being an independent contractor and running a company can help you make an informed decision that best suits your goals and aspirations.