Understanding the role Sole Proprietorship as a Business Entity for Freelancers

As a freelancer, you are always so focused on providing a great product or service but putting the administrative aspect of running our company on the backburner is easy. Having a freelancer doesn’t just mean flexibility and independence. It also means you are the founder and a businessmen. How you structure your company is as important to your success as your product or service quality. Registering a business might seem like a bunch of trivial and dull administration, but it might cost you running your company under the wrong business structure. This could range from missing out saving your annual income taxes to losing all of your savings, including your car and house.

To help you determine which structure is right for your freelance company, here is a brief overview of popular business entities. 

First of all… What Is a Business Entity?

A corporate organization is the company’s legal framework. As a company owner, you make all the important decisions in your biz. You’re the real company chief! And one of the first choices you’ll make is which business structure is ideal for your freelance offerings.

Depending on the type you select, you can need to meet certain operational standards, file certain government documents, and obey certain tax laws.

Sure, even the smallest freelance company has a legal framework.

Which are the major market types of business registrations?

Any of these companies or legal structures have their bunch of advantages and disadvantages that you should weight before investing.

Why Should A Freelancer Choose a Business Entity?

In reality, many freelancers don’t think much about choosing a business structure. They just start a business without deciding whether or not to organize their company legally. Although this is natural, there is a big drawback: you’ll end up with one of the default companies, which is a sole proprietorship if you’re operating alone, or a partnership if the company has two or more members.

Everything depends. Such default roles may be ideal for you, but if you settle for them without considering your other choices, you may lose some of the advantages that come with alternatives.

Now that we’ve covered the basics, let’s speak about pros and disadvantages that a freelancer may experience while choosing the sole proprietorship.

Understanding Sole Proprietorship for Freelancers

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A sole proprietorship is the default business entity for freelancers. This means that if you start working as a freelancer without LLP registration or a Partnership firm, you’ll automatically operate as a sole proprietor. But, to ensure that you leverage tax benefits and get the legal identity, it is best to register it. 

A sole proprietorship is easy and cheap to form and run, so it’s a fantastic choice when you’re first getting up and running.

Plus, you can always go back and form an LLP or Private Limited Company later on, once your business becomes more established and you’re earning more.

Why Choose Sole Proprietorship as a Freelancer?

It’s the cheapest and simplest legal type for a one-person show. You don’t have to get government approval or pay fees to operate as a sole proprietor.

So if you want to use a name other than your business name, you’ll need to register a fictitious business name with your county.

As a single owner, you own your business and all its properties, just like you own your house or car. And you’re the only one in charge of your business, so you have complete authority.

Easy on Taxes!

Because you are considered one for tax purposes, you don’t pay taxes or file tax returns separately from your company.

State the profit earned or loss incurred in the ITR-3 form for filing Income Tax Return. You can mention all the expenses incurred in running the business under the Schedule “Profit and Loss” of the form. The details regarding the balances of assets and liabilities need to be mentioned under the schedule “Part-A BS”

And if in case you incur loss in your business, you can use it to offset other sources’ profits. Adding your earnings to any other sources such as interest income or rental income, you record, such as interest income or your partner’s income, gives you your overall income to be taxed at a slab equivalent to filing your ITR

Finally, as a sole proprietary freelancer you can also claim deductions for investments made under any tax saving funds like PPF and others. You can also claim deduction for premium paid for your medical insurance. Like this, there are various deductions available to individual which you and your business can benefit from. You can claim such deductions under the Schedule “VI-A” of the ITR form. Apart from deductions, you will also be eligible for rebate if your net taxable income is less than Rs.5 lakhs. Your Income shall be taxed as per the slab-wise tax rates applicable to the individual.

The Downside?

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Most freelancers give up the sole control because they want to escape personal responsibility.

In a sole proprietorship, the owner and company are one that makes a single owner directly responsible for all debts and liabilities.

That means, a business creditor, an entity or a company you owe money, can go after all your personal and business assets to get what you owe them. It could include your bank accounts, cars, and even your building. Similarly, a personal creditor, an entity or a company you owe money to after purchasing personal products can go after the assets of your business. Including your company bank account and supplies.

If you’re involved in any business-related law suite then you are directly responsible because you’re a sole proprietor. 

Bottomline

So, better to evaluate boons and banes involved in registering sole proprietorship as a freelancer before getting started. In case you are looking to get the protection out of personal liability then you can always choose from other options available. 

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