Choosing the business form
A freelance practice's legal form determines how the business is separated from its owner, what administration it carries and which clients it can serve. The choice depends on the jurisdiction, the practice's finances and its exposure to liability.
The choice between personal trading and a company
Most countries offer a choice between self-employment as a sole trader or autonomous worker and incorporation as a company; partnerships may also be appropriate. Ease of setup, operating cost, personal-asset protection and how much money the owner retains are practical comparison criteria. The choice should take account of business goals, including full-time or part-time work, the personal assets exposed to a lawsuit and clients' perceptions of professionalism and permanence. Tax treatment, liability and marital status also matter: a sole income provider may want a limited liability company to protect the business and personal assets. Legal advice and an accountant's help are recommended when selecting the form.
A limited company is a legal entity separate from its owner, with rights and responsibilities and the ability to own property and equipment. Liability limited to company assets can protect the owner's home from company creditors, but fraud, negligence or deliberately flouting the rules can expose owners personally. The company must also remain solvent: limited liability does not keep the business itself safe from lawsuits, a client's bankruptcy or disputed tax returns and penalties.
A corporate form can convey permanence and commitment to clients, particularly for a new freelancer; an established sole trader's clients may already know those qualities. In the US, practitioners have recommended an LLC or S corporation for the legally recognised separation between personal and professional life and the theoretical protection of personal assets in a lawsuit. To preserve that separation, business and personal finances should be kept completely separate, along with phone and internet services and, where possible, working space.
Administration and national differences
A company carries more rules, paperwork and costs than an unincorporated business, including accountancy fees for annual accounts, but gives more control over how and when the owner is paid. Minimum working capital, notary fees and the tax treatment of dividends can cancel out its cost advantages.
The European comparisons in 2014 differed by country.
- United Kingdom: A limited company could be commercially sound and tax-efficient provided IR35 did not apply. There was no minimum capital requirement, setup fees were low and formation could take 24 hours. Combining salary and dividends could produce tax savings and help build a business buffer. For work through recruitment agencies, the agency could pay a company invoice in full, leaving the owner control over salary and dividends; agencies had to pay unincorporated businesses through PAYE, deducting tax at source without giving the freelancer employee rights or benefits.
- Ireland: Low corporation tax could make incorporation attractive.
- Germany: Liberal-profession status was generally more cost-effective for medical writers than a capital company such as a GmbH or UG. A writer with an academic background could usually obtain that status, avoid trade tax and reduce bureaucracy. Liability insurance and appropriate contractual provisions could provide liability protection while working as a liberal professional.
- Spain: Incorporation was unlikely to save money until business profits exceeded €90,000.
- France: The simplified auto-entrepreneur regime for turnover not exceeding €32,900 could offer favourable tax treatment and less paperwork than a company.
In Spain, options discussed in November 2024 included remaining a freelancer or forming an LLC to protect personal assets, with advice to consult an accountant or tax adviser about potential financial benefits.
Setting up a company makes the owner a director and shareholder; some freelancers divide the shares equally with a spouse or partner. Directors are responsible for lawful management in shareholders' interests, submitting paperwork, paying taxes and maintaining the appropriate records. In the UK in 2014, filings included corporation tax and VAT returns, a Companies House return and real-time payroll reports.
Local requirements need establishing before work begins, since some places require licences or certifications to run a freelance business. At the end of 2017, a German writer's accountant told her that evidence of writing qualifications was unnecessary but that confirmation of freelance status from the tax office was needed before starting.
US forms and their trade-offs
In a 2015 US comparison, a sole proprietorship was simple to start under a Social Security or federal identification number, treated all income as personal and required little paperwork, but offered no separation of business and personal assets. A professional-services lawsuit could therefore expose the owner's car, home and retirement account; the risk of being sued was thought probably small, but personal assets could make the business a more attractive target.
An S corporation was more complicated to establish and manage but could protect personal assets, and the freelancer became an employee of the company. Its 2015 comparison with sole proprietorships and LLCs identified a tax advantage in passing some income to the owner without Social Security and Medicare payroll taxes. In 2009, a practitioner suggested that S-corporation owners might be able to pay year-end bonuses without those deductions, whereas money remaining in an LLC passed through to personal income. An S corporation was preferred for most freelancers to a C corporation, whose pre-tax deduction for health insurance came with corporate taxation.
An LLC was considered probably the best entity for most freelancers in the 2015 practitioner comparison: it offered asset protection similar to an S corporation and could have lower business taxes in some states. Another 2015 practitioner account favoured an LLC as an easy, cost-effective alternative to incorporation, generally inexpensive to form at a state-dependent cost, taxed like a sole proprietorship and allowing profits to be taken at any time. An LLC can have a single member, and client contracts are between the client's company and the LLC rather than the individual writer. Some new freelancers wait until they decide freelancing is permanent before forming one.
In AMWA's 2019 survey, 174 full-time freelance respondents reported sole proprietorships (41%), LLCs (39%), S corporations (16%) and other forms (about one in 20). Among respondents under 35, 64% were sole proprietors; 57% of those with doctorates had LLCs, compared with 28% of those with bachelor's degrees.
Client requirements
Some UK clients refused to use sole traders in 2014 because employment-status reclassification could make the client liable for additional tax; invoicing through a limited company placed that liability on the freelancer's company under the IR35 rules described at the time. A UK writer starting a business in 2015 chose a limited company partly because larger companies, including pharmaceutical companies, often required provider incorporation; all UK medical writers with their own businesses whom he knew were incorporated. His approximate formation cost was £100, and a unique name could be checked through Companies House.
Another UK writer chose sole-trader status in 1992 for simplicity, then formed a limited company in 2003 because some clients preferred one; in 2015 she kept it dormant so that it could be used at short notice.
Employment status and legal form
In the EU in 2014, laws against sham self-employment sought to protect workers from losing employment rights against their wishes and governments from lost tax revenue; legitimate businesses could nevertheless face suspicion. Member states used legal tests of employment status for tax purposes, commonly assessing subordination or employer control, with other rules differing by country.
The UK tests described in 2014 asked three questions.
- Direction and control: Did the client supervise the freelancer as a boss would?
- Personal service: Was the freelancer obliged to do the work personally at all times rather than being free to appoint a substitute?
- Mutuality of obligation: Was the client obliged to keep offering work and the freelancer obliged to accept it?
Affirmative answers could lead to being deemed employed and recovery of additional tax and National Insurance. In Spain in 2014, a freelancer receiving more than 75% of income from one client had to make a contract identifying financial dependence on that client.
In 2018, US freelancers reported clients insisting on W-2 status, making them staff for those engagements and potentially affecting flexibility, estimates, invoicing, availability to other clients, income and taxes. In some cases, avoiding W-2 status might require substantial professional and commercial liability insurance.
One experienced writer's accountant had advised limiting W-2 wages to a small share of income because they might affect self-employed status. Her practical position in 2018 was that a newcomer might need W-2 engagements to gain experience, samples and references, while an established freelancer with strong clients and income could refuse them; appealing or necessary projects could still justify flexibility, with attention to tax consequences.
Another writer, primarily based in New York, had accepted W-2 arrangements for two clients in 20 years; her 2018 experience addressed five practical concerns.
- She served six to twelve clients annually and believed she could confirm her non-employee status if necessary.
- She worked on site for only one client, sporadically, and otherwise mainly from home at chosen hours.
- She set her own rates, retaining control over estimates. One client's online time logging was onerous, although some 1099 clients also required their timesheets; after complaints, its HR staff entered her time weekly.
- She made clear from the outset that she had several clients and was not being retained, so lost no other jobs or clients.
- Her accountant handled taxes using her 1099s, W-2s and clear notes identifying the client behind each income stream.
California's AB 5 took effect on 1 January 2020, while similar independent-contractor legislation was under consideration in New Jersey, New York and other states that year. Freelancers discussing the position in 2020 reported California relaxing its law to allow genuinely independent freelancers to continue, while other states had followed its approach. In 2022, experienced freelancers advised demonstrating a genuine business by establishing a recognised entity such as an LLC or S corporation.