While nearly one-third of the American workforce does some form of independent contract work, more professionals are becoming freelance employees given the current economic climate and soaring unemployment rate.

As a seasoned full-time independent worker or a part-time freelancer, you may be aware of what to expect as an independent worker. Advantages include such perks as being your own boss, having the freedom to decide what you take on, working from home, and making your own schedule. But don’t forget the downside: No steady paycheck, less job stability, legal liabilities and no benefits such as health insurance, a pension or year-end bonus.

While certain benefits and political representation come from organizations like the Freelancers Union (link), there are ways you can protect yourself as an independent entrepreneur.

As an individual conducting business independently, commonly referred to as a sole proprietor, your company has no legal difference from yourself. You cannot sell shares of your company, which can complicate raising investment capital. All profits made are counted as personal income, so you only have to pay personal income taxes as opposed to corporate taxes. However, you are financially liable for all debts assumed by your company, including your personal assets, should the company be sued. Additionally, benefits like health, life and disability insurance must be paid out of pocket. These disadvantages may make it difficult for acquiring employees.

In order to insulate yourself as a business, from a legal and tax standpoint, a freelancer has the option to create a limited liability company, an S corporation or a C corporation, each with their own advantages and disadvantages. (Note: An attorney should be consulted prior to setting up either an LLC, S Corporation or C Corporation. Additionally, consult the IRS regarding tax stipulations for these legal entities.)

Advantages of Forming a Limited Liability Company, or LLC

• Flexible way to protect a business owner from liability
• LLCs are taxed through what’s known as pass-through taxation (same in a sole proprietorship or an S corporation) where profits made from the company pass-through as personal income tax and the owner is taxed as such.
• LLCs can raise investment capital by selling shares of the company, but aren’t required to report annually to investors
• An LLC can be established with just one person (in most states).
• An LLC doesn’t need to report to a board of directors, but can be member-managed instead
• Less mandatory record keeping and administration
• Flexibility regarding how profits are divided among owners
• Easier to get employees by offering full benefits through the company (family members can be put under your LLC’s health insurance)

Advantages of Forming an S Corporation

• Also a pass-throug” entity for tax purposes, same as a sole proprietorship and LLC.
• Only the salary paid to the employee-owner is subject to employment tax – while an S corp. can give a “distribution” to its owner, or members, it isn’t subject to employment tax.
• Liability protection from creditors
• Must have no more than 100 investors
• Profits must be distributed in terms of stock ownership
• Can offer employees full benefits

Advantages of Forming a C Corporation

• Unlike an S Corporation, a C corporation is allowed to have as many investors as they see fit – a C corp. is owned by its shareholders.
• The corporation is taxed on its income, and shareholders are taxed on the income when distributed as dividends.
• Bylaws dictate number of directors, officers, stockholder meetings, etc., ensuring that decisions are made collaboratively
• A corporation is a separate legal entity and as such its owners are not personally liable for debts incurred.
• Can offer employees full benefits