From the June 2001 issue of Entrepreneur

Q: Can you be self-employed without incorporating your business?

Jo Ann Winter
Via e-mail

A: Yes, you can. In fact, most self-employed individuals do not incorporate. Most operate as sole proprietors. Also, some states allow individuals to form limited liability companies (LLCs).

Here are factors to consider in choosing the legal form for your business:

Cost and ease to form and maintain.
Effect on your business's image.
Risk to your personal assets and future earnings.
Your goals for your business' size.
Your need for outside financing.
Amount of government regulation involved in your business.
The impact on your taxes.

LLCs have some key benefits: They limit the risk to your personal assets and cost less to form and maintain than corporations. However, if your goals are to grow into a much larger company or attract outside investors, incorporating from the start makes sense.

Many people who ultimately incorporate begin as sole proprietors and then incorporate once their businesses grow. Experts often recommend incorporating when a sole proprietorship's earnings grow to $100,000 a year. Sole proprietors report their earnings on Schedule C of their Form 1040. Corporations and LLCs file separate returns, though LLCs, like partnerships, are "pass-through" entities that don't pay taxes themselves. While you can read books or Web sites about the pros and cons of choosing one form of business over another, it's a good idea to get the advice of legal and tax professionals who know your particular situation.


Paul and Sarah Edwards' most recent book is Changing Directions Without Losing Your Way. Send them your start-up business questions at www.workingfromhome.com or in care of Entrepreneur.