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Posted by: Charles P Myrick CPA Posted on: Aug 28 2020 Posted in: business entities

What is the Best Business Entity for a Solopreneur?

What is a solopreneur, and what kind of business can a solopreneur form or develop? The term “solopreneur” is often used interchangeably with "entrepreneur," "freelancer," "self-employed" or "small business owner,” perhaps since all of them will likely have to pay self-employment taxes and file 1099 forms. While any of these terms may be simultaneously valid for your business, there are distinctions between them.

Small Business Owner – An individual who attempts to gain profit through successfully operating a company. They get the first right to profit and make decisions. They have brick and mortar locations or work online. They sell specific products or services for which customers come to them. They often have employees and, while they may customize, they don’t usually tailor their services to whatever the customer wants.

Self-Employed – One who earns a living based on their own business or profession as opposed to a wage or salary from an employer. They are technically a business owner and their own boss, though they may not operate with a formal structure that includes others.

Freelancer – One who, through short-term, one-off, and multiple commitments, pursues a profession. Freelancers do not make long-term commitments to any one employer. They may work remotely or travel, and usually tailor skills and services to match the needs of a variety of clients.

Entrepreneurs and Solopreneurs

Instead of offering established products and services, entrepreneurs and solopreneurs develop new or innovative services or solutions while assuming all their enterprise risks. Differences between them:

  • Entrepreneur – Working alone initially, they usually grow their business, become managers of others, and then leave them in charge. They typically aspire to sell their business to a larger entity for a profit and then start over. They have many irons in the fire. They make money by developing a profitable business and then selling it.
  • Solopreneur – They tend to focus on one passion at a time, and perhaps for the rest of their lives. They may network but usually continue working alongside other workers or investors they may bring in. Their goal is to build and stick with that company.

Business Entity Choices for Solopreneurs

If you call yourself a solopreneur, even if one or more of the other terms also apply, you basically have two choices regarding your business structure:

  • Sole Proprietorship – Not being a formal business entity, it is the easiest to set up. You automatically engage in business using your own surname or a DBA (doing business as) fictional company name. This name is not reserved and can be taken by an LLC. Your tax liabilities are reflected on individual tax returns under your social security number for ID, leaving your personal assets at risk if the company is sued.
  • Limited Liability Company (LLC) – LLCs have become extremely popular since they provide the liability protection of a corporation with a company tax ID while allowing the owner to choose and reserve the company name. Owners also determine how the entity is taxed depending on the type of management they select.

The type of business you call yourself is more indicative of who you are to your potential customers or clients. In contrast, the business structure you chose has serious tax and legal implications. Myrick CPAs can help you sort through all the details and questions that arise when setting up your business as a solopreneur. Get it right the first time by calling our professionals to guide you through the process.