Sole Proprietorship vs. Independent Contractor: Business Structure
When deciding between a sole proprietorship and independent contractor status, here’s what the business structure looks like:
- Sole proprietorship: Many sole proprietors provide products or services to a customer without a contract. But in some cases, sole proprietors can take on some work as independent contractors for other companies.
- Independent contractor: An independent contractor provides services to clients under a contract for a predetermined fee.
Sole Proprietorship vs Independent Contractor: Earnings
Sole proprietors and independent contracts both earn money. Here’s how they bring in funds.
- Sole proprietorship: A sole proprietor can earn money by selling products or services to clients.
- Independent contractor: An independent contractor earns money by providing services to clients based on a written contract.
Sole Proprietorship vs Independent Contractor: Income Tracking
Whether you are a sole proprietor or independent contractor, tracking your income will come in handy at tax time.
- Sole proprietorship: As a sole proprietor, you’ll need to track all of your income by yourself. You can explore self-employed tax deductions for further information.
- Independent contractor: As an independent contractor, you’ll receive a 1099 from clients that paid you more than $600 for the year. But it’s still a good idea to track your income to help you prepare for your annual tax bill.
Sole Proprietorship vs Independent Contractor: Tax Requirements
Regardless of your business structure, you’ll still face tax obligations. Here are what forms you’ll have to use for both.
- Sole proprietorship: Sole proprietors are responsible for self-employment taxes. Throughout the year, you must pay estimated quarterly taxes. At the end of the year, you must file a Schedule C and 1040 tax form.
- Independent contractor: Independent contractors are also responsible for self-employment taxes. Throughout the year, you must pay estimated quarterly taxes. At the end of the year, you must file a Schedule C and 1040 tax form.
Sole Proprietorship vs Independent Contractor: Financial Risk
Sole proprietorships and independent contractors carry similar levels of financial risk.
- Sole proprietorship: Sole proprietors are held personally responsible for the business. So, if your business incurs any debts or legal obligations, then the owner is on the hook for those liabilities.
- Independent contractor: Independent contracts are held personally responsible for their work. The details of your responsibility will vary based on your contract.
Sole Proprietorship vs Independent Contractor: Examples
The type of operator you become will vary based on your profession. Below are a few examples of each option. But keep in mind that many business owners have the ability to operate as an IC while maintaining a SP.
- Sole proprietorship: Food truck operators, online store owners, freelance writers, and graphic designers.
- Independent contractor: Copy editors, web developers, accountants, and transcriptionists.
Sole Proprietorship vs. Independent Contractor: Pros and Cons
When choosing between these two business classifications, there are some advantages and disadvantages to consider with each. Here’s a closer look at both options.
Here are the pros & cons and characteristics of sole proprietorship:
Pros of Being a Sole Proprietorship
- Easy business set up: A sole proprietorship is the easiest type of business structure to start. You won’t need to file any paperwork to get started.
- Complete control: As a sole proprietor, you are entirely in charge of your business decisions.
- Grow at your pace: As a sole proprietor, you can grow to build the business you’ve dreamed of.
Cons of Being a Sole Proprietorship
- No separation of personal and business assets: This lack of separation means that sole proprietors are liable for any business debts or lawsuits.
- Challenging to onboard investors: Investors are wary of investing in sole proprietorships because there is no distinction between personal and business assets.
Pros of Being an Independent Contractor
- Higher earning potential: Many independent contractors earn more than they would as regular employees. That’s because the employer isn’t responsible for covering other costs like healthcare or FICA taxes. Since an Independent Contractor is usually paid on a per job/contract basis, being efficient can lead to higher revenues due to less wasted time.
- Flexible schedule: As an independent contractor, you are completely in charge of your own schedule.
Cons of Being an Independent Contractor
- Income can be unpredictable: An independent contractor won’t have the guaranteed income stream that comes with being an employee.
- No health insurance: You won’t be able to tap into employer-sponsored health insurance.
Sole Proprietorship vs. Independent Contractor: Which Is Right For You?
The good news is that you don’t have to choose between a sole proprietorship and an independent contractor. Instead, many self-employed people choose to work as both contractors and sole proprietors.
For example, let’s say that you are a writer. You can choose to work as an independent contractor for some companies to provide regular content. Additionally, you could write a book that brings in an additional revenue stream.
In many cases, self-employed people choose a mix of work that allows them to operate as both independent contractors and sole proprietors.
FAQs about Sole Proprietorships and Independent Contractors
Have more questions about sole proprietorships vs independent contractors? Here are the answers you’ve been searching for.
