Is a Freelancer a Sole Propietor?

So you’ve started freelancing and you’re wondering about your business structure. Maybe you’ve heard the term “sole proprietorship” thrown around, but you’re unsure if that’s what you are by default. Or perhaps you’re trying to figure out if there are better options out there for your growing freelance business.

The short answer? Yes, if you’re freelancing without having formally established a different business entity, you’re automatically operating as a sole proprietorship. As confirmed by recent legal sources in 2025, “Sole proprietorship is the default business entity for freelancers. This means that if you start working as a freelancer without forming an LLC or corporation you’ll automatically operate as a sole proprietor.” But there’s a lot more to understand about what this means for you and your freelance business.

In this comprehensive guide, we’ll break down everything you need to know about business entities for freelancers—from the automatic sole proprietorship status to the pros and cons of alternatives like LLCs and corporations. We’ll even cover when it might be time to consider making a change to better protect yourself and optimize your taxes.

Understanding Freelancers and Business Entities

When you first start freelancing, legal structures are probably the last thing on your mind. You’re focused on finding clients, delivering your work, and maybe figuring out how to price your services. The business entity question often takes a backseat.

Here’s something that might surprise you: over 80% of freelancers operate as sole proprietors. Many stay that way for their entire careers. But is that the right choice for you?

What Is a Business Entity?

A business entity is simply the legal structure that your business falls under. Each type comes with different rules about:

• How you pay taxes
• Your personal liability for business debts
• Paperwork and legal requirements
• How you can raise money or bring on partners

For freelancers, there are four main types of business entities worth considering:

1. Sole Proprietorship
2. Limited Liability Company (LLC)
3. S Corporation
4. C Corporation

(We’re leaving out partnerships since they require multiple owners, but if you’re working with another freelancer, that could be something to explore.)

According to 2025 legal resources, “When considering the different types of entity options for freelance businesses, it’s crucial to weigh the pros and cons to determine what’s best for an individual business’s situation.” Let’s dive into each option to help you understand which might be right for you.

Sole Proprietorship: The Default Freelancer Business Entity

If you’ve started freelancing without filing any paperwork to create a formal business structure, congratulations—you’re already a sole proprietor! This is the default business entity for independent workers who haven’t chosen something else.

Let’s break down what this means for you.

How Sole Proprietorships Work for Freelancers

As a sole proprietor freelancer, you and your business are legally one and the same. There’s no separation between your personal and business finances from a legal perspective, even if you maintain separate accounts (which is still a good practice).

This simplicity is both the biggest advantage and disadvantage of sole proprietorships.

Advantages of Being a Sole Proprietor Freelancer

Simple Setup

The sole proprietorship is the easiest and least expensive business entity to establish and maintain. In fact, you don’t have to do anything special to create one—it happens automatically when you start working for yourself.

You might need to get a business license depending on your local regulations, and if you want to use a business name other than your personal name, you’ll need to file a “doing business as” (DBA) or “fictitious business name” with your county.

Straightforward Taxes

Tax filing is relatively simple for sole proprietor freelancers. You’ll report your business income and expenses on Schedule C of your personal tax return (Form 1040). Your business profits are added to any other personal income you have, and you pay taxes at your personal income tax rate.

This means you only have to file one tax return, not separate ones for you and your business.

Complete Control

As a sole proprietor, you have 100% control over your business. There’s no board of directors or partners to consult with. You make all the decisions about how to run your freelance practice.

Easy to Change Later

If you decide that a sole proprietorship isn’t right for you down the road, it’s relatively easy to convert to an LLC or corporation as your business grows.

Disadvantages of Sole Proprietor Status for Freelancers

Unlimited Personal Liability

The biggest downside to operating as a sole proprietor is that there’s no separation between you and your business when it comes to liability. If your business incurs debts or gets sued, your personal assets (like your home, car, and personal bank accounts) are at risk.

As one legal resource from 2025 explains: “There is no legal separation between a freelancer and their business as a sole proprietor. The owner may be held personally responsible for all financial and civil liabilities.” For example, if a client sues you over work you delivered, they could potentially go after your personal savings or even your house to satisfy a judgment.

Limited Tax Optimization

While taxes are simpler as a sole proprietor, you may not have access to some of the tax strategies available to other business entities. This becomes more significant as your income grows.

Self-Employment Taxes

As a sole proprietor, you’ll pay self-employment taxes (Social Security and Medicare) on your net business income. This is currently 15.3% on 92.35% of your profits, which can be a significant expense for successful freelancers.

Potential Credibility Issues

Some larger clients or corporate clients might prefer to work with more formally established business entities rather than sole proprietors. This could potentially limit your client pool, though it’s becoming less common as freelancing continues to grow in popularity.

When Should Freelancers Consider Other Business Entities?

While sole proprietorship is the default and works well for many freelancers, there are specific situations where you might want to consider a different business structure.

Consider an LLC If:

• You’re concerned about protecting your personal assets
• Your freelance work carries a higher risk of lawsuits or liability
• You’re making enough money that the additional costs of maintaining an LLC make sense
• You want the flexibility to choose how you’re taxed (as either a sole proprietor, partnership, or corporation)
• You want increased credibility with clients, especially larger corporate clients

Recent research from 2025 indicates that “larger institutional organizations don’t prioritize working with individuals, which can be a roadblock in your freelance business. It helps to have an LLC or a corporate structure, business name, and process for conducting business when trying to win corporate clients.”

Consider an S Corporation If:

• You’re earning substantial income (generally $60,000+ annually) and want to potentially reduce self-employment taxes
• You want liability protection but also tax advantages
• You’re comfortable with more administrative requirements and costs

Consider a C Corporation If:

• You plan to seek outside investors or venture capital
• You want to offer stock options to potential employees
• Your business has substantial profits that you want to reinvest rather than distribute

Not sure which is right for you? A good rule of thumb is to start as a sole proprietor if you’re just beginning your freelance journey, then reassess as your business grows and becomes more established.

The LLC Option for Freelancers

Among the alternatives to sole proprietorship, the Limited Liability Company (LLC) is often the most attractive next step for freelancers. Let’s take a closer look at how an LLC works for a freelance business.

How an LLC Works for Freelancers

An LLC creates a legal separation between you and your business. This means your personal assets are generally protected from business liabilities. Your business becomes its own legal entity that can own property, have bank accounts, hire employees, and enter into contracts.

For freelancers who work in fields with higher liability risk (like consulting, health coaching, or technical services), this protection can be valuable peace of mind.

Advantages of an LLC for Freelancers

Personal Asset Protection

The primary benefit of an LLC is that it shields your personal assets from business debts and many types of lawsuits. If a client sues your business or your business can’t pay its debts, creditors generally can’t come after your personal savings, home, or other assets.

According to updated 2025 legal guidance: “After forming an LLC, your business has its own legal existence that’s separate from you. It’s even considered its own legal ‘person.'” This separation is what provides the crucial liability protection that many freelancers eventually seek.

Tax Flexibility

LLCs offer notable tax flexibility. By default, a single-member LLC is taxed just like a sole proprietorship (called a “disregarded entity” by the IRS). But you can also elect to be taxed as an S corporation or C corporation if that would be more advantageous for your situation.

As of 2025, experts note that “LLCs aren’t recognized by the IRS for tax purposes, and single member LLCs are referred to as ‘disregarded entities.’ LLCs will be taxed the same as a sole proprietorship, a partnership, or a corporation. You, the single owner, will decide how you want to be taxed.”

Credibility Boost

Having “LLC” after your business name can lend additional credibility with clients and partners. It signals that you’re serious about your business and have taken steps to establish it formally.

Easier to Bring on Partners

If you ever want to bring on partners or co-owners to your freelance business, an LLC makes this process much cleaner than trying to transition from a sole proprietorship.

Disadvantages of an LLC for Freelancers

Formation Costs and Ongoing Fees

Unlike a sole proprietorship, forming an LLC requires filing paperwork with your state and paying filing fees. These fees vary by state but can range from $50 to several hundred dollars. Many states also require annual reports and fees to maintain your LLC status.

More Administrative Requirements

While less burdensome than corporations, LLCs do have some administrative requirements. You should maintain separate business accounts, keep good records, and in some states, file annual reports or pay franchise taxes.

Self-Employment Taxes Still Apply

If you’re a single-member LLC taxed as a sole proprietorship, you’ll still pay self-employment taxes on all your profits. (This can be addressed by electing S corporation taxation, discussed below.)

S Corporation: The Tax Advantage Play

For freelancers earning higher incomes, the S corporation structure (either as a formal corporation or as an LLC electing S corporation taxation) can offer significant tax advantages.

How S Corporations Work for Freelancers

An S corporation is a special tax status that allows your business to be taxed as a pass-through entity (like a sole proprietorship) while giving you the option to split your income between salary and distributions.

As an S corporation owner, you must pay yourself a “reasonable salary” for the work you do, which is subject to self-employment taxes. However, additional profits can be taken as distributions, which are not subject to self-employment taxes (though they are still subject to income tax).

Advantages of S Corporation Status for Freelancers

Potential Tax Savings

The primary advantage of S corporation status is the potential to save on self-employment taxes. By taking some of your income as distributions rather than salary, you may reduce your overall tax burden.

For example, if your freelance business makes $100,000 in profit, as a sole proprietor, you’d pay self-employment taxes on all of it. As an S corporation, if you pay yourself a reasonable salary of $60,000 and take $40,000 as distributions, you’d only pay self-employment taxes on the $60,000.

Liability Protection

Like an LLC, an S corporation provides liability protection, separating your personal assets from your business obligations.

Disadvantages of S Corporation Status for Freelancers

Higher Administrative Burden

S corporations require more paperwork and compliance than sole proprietorships or standard LLCs. You’ll need to run payroll (even if just for yourself), file additional tax forms, hold annual meetings, and maintain corporate minutes.

Reasonable Salary Requirement

The IRS requires S corporation owners to pay themselves a “reasonable salary” for the work they do. If your salary is deemed unreasonably low, you could face penalties. This means you can’t just take all your income as distributions to avoid self-employment taxes.

Higher Costs

Between state fees, accounting costs, and payroll processing, S corporations are typically more expensive to maintain than sole proprietorships or standard LLCs.

Making the Decision: Which Business Entity Is Right for Your Freelance Business?

Now that you understand the options, how do you decide which business entity is right for your freelance business? Here are some key factors to consider:

1. Liability Risk Assessment

Consider the potential risks in your line of work. Do you provide advice that clients rely on heavily? Work with expensive equipment? Enter clients’ homes or businesses? The higher your liability risks, the more you should consider an LLC or corporation for protection.

2. Income Level

At lower income levels, the simplicity and low cost of a sole proprietorship often make the most sense. As your income grows—especially above $60,000-$70,000—the tax advantages of an S corporation may outweigh the additional costs and complexity.

3. Business Goals

Think about your long-term plans. Are you planning to grow beyond just yourself? Looking to bring on partners or employees? Want to raise capital? These goals might push you toward an LLC or corporation structure earlier than income alone would suggest.

Recent analysis from 2025 points out that “an LLC can grow with you, should you decide to take on a partner or employees at some point.” This flexibility makes it a popular choice for freelancers with ambitions to expand their operations over time.

4. Administrative Tolerance

Be honest about how much administrative work you’re willing to handle (or pay someone else to handle

5. State-Specific Considerations

The costs and requirements for different business entities vary significantly by state. In some states, LLCs are inexpensive and low-maintenance; in others, they come with substantial fees and reporting requirements. Research your specific state’s rules before deciding.

How SolidGigs Can Help Freelancers Build Successful Businesses

No matter which business entity you choose, finding consistent, quality clients is essential to building a sustainable freelance business. That’s where SolidGigs comes in.

SolidGigs is a premium lead generation tool that curates the best freelance jobs from across the web and delivers them straight to your inbox, saving you hours of job searching every week. Our team sifts through hundreds of job boards and only sends you the top 1% of opportunities that match your skills and experience.

While SolidGigs can’t file your LLC paperwork for you, we can help you build the consistent, high-quality client base that makes upgrading your business structure worthwhile in the first place. When you’re landing better clients and raising your rates with the help of SolidGigs leads, that’s when investing in an LLC or S corporation starts to make a lot more sense.

Step-by-Step Guide to Changing Your Freelance Business Entity

If you’ve decided it’s time to move beyond sole proprietorship, here’s a simple roadmap to follow:

From Sole Proprietorship to LLC

Step 1: Choose a Name for Your LLC

Select a name that’s available in your state and complies with your state’s naming rules (usually must include “LLC” or “Limited Liability Company”).

Step 2: File Articles of Organization

Submit the required paperwork (usually called “Articles of Organization”) to your state’s business filing office (typically the Secretary of State). Pay the filing fee, which varies by state.

Step 3: Create an Operating Agreement

While not required in all states, creating an operating agreement is strongly recommended. This document outlines the ownership and operating procedures for your LLC.

Step 4: Get an EIN

Obtain an Employer Identification Number (EIN) from the IRS, even if you don’t have employees. This will be your business tax ID number.

Step 5: Open Business Bank Accounts

Open separate business checking and savings accounts using your new LLC name and EIN.

Step 6: Update Your Business Information

Update your business information with clients, vendors, and on all platforms where you have a presence. This includes contracts, invoices, social media, websites, and business cards.

For S Corporation Election (After Forming an LLC or Corporation)

Step 1: File Form 2553

Submit IRS Form 2553 (Election by a Small Business Corporation) to elect S corporation status. This must generally be done within 75 days of forming your entity or by March 15 of the tax year you want the election to take effect.

Step 2: Set Up Payroll

Establish a payroll system to pay yourself a reasonable salary. This can be done through a payroll service or accountant.

Step 3: Plan for Quarterly Tax Payments

Work with your accountant to plan for quarterly estimated tax payments based on your salary and expected distributions.

Maintaining Your Business Entity as a Freelancer

Once you’ve established your new business entity, you’ll need to maintain it properly to keep your liability protection and tax benefits intact.

For LLCs:

• File annual reports and pay any required fees in your state
• Keep business and personal finances strictly separate
• Maintain good records of business transactions and decisions
• Use contracts that clearly identify your business as an LLC
• Make sure all business documentation uses your LLC name

For S Corporations:

• Hold and document annual meetings (even if you’re the only shareholder)
• Maintain corporate minutes
• File Form 1120S annually with the IRS
• Pay yourself a reasonable salary
• Make tax payments on schedule

Expert Tips for Freelancers Considering Business Entity Changes

Before making any changes to your business structure, consider these expert tips:

Consult with Professionals

Talk to both an accountant and a lawyer before changing your business structure. While this advice isn’t free, it can save you much more in taxes and potential legal issues down the road.

Think Long-Term

Choose a business structure that accommodates where you want your freelance business to be in 3-5 years, not just where it is today.

Consider Timing

The beginning of a calendar year is often the cleanest time to make business entity changes from a tax perspective.

Start Simple, Upgrade When Necessary

There’s nothing wrong with starting as a sole proprietor and upgrading your business structure as you grow. Many successful freelancers follow this path.

Focus on Revenue First

The best business structure in the world won’t help if you don’t have enough clients. Focus on building a strong client base through platforms like SolidGigs, then optimize your business structure as your revenue grows.

Conclusion: Your Freelance Business Entity Journey

Yes, as a freelancer, you are automatically a sole proprietor if you haven’t formally established another business entity. For many freelancers, especially those just starting out, this default option works perfectly well.

As your freelance business grows and evolves, you may find that converting to an LLC or electing S corporation status makes sense from both a liability protection and tax optimization perspective. The right time to make this change varies for everyone, but it’s worth reassessing your business structure annually as your income and client base grow.

Remember that finding quality clients is the foundation of any successful freelance business, regardless of its legal structure. While you’re thinking about business entities, don’t neglect the core of your business: delivering great work to great clients. Tools like SolidGigs can help you find those ideal clients so you can focus on what you do best.

Whatever business entity you choose, the most important thing is that it supports your goals as a freelancer—whether that’s maximizing flexibility, minimizing paperwork, optimizing taxes, or protecting your personal assets. There’s no one-size-fits-all answer, just the right structure for your unique situation.

One more thing...

You didn't start freelancing to spend hours every week searching through job boards. You started freelancing to do more work you enjoy! Here at SolidGigs, we want to help you spend less time hunting and more time doing work you love.

Our team of "Gig Hunters"—together with the power of A.I.—sends you high-quality leads every weekday on autopilot. You can learn more or sign up here. Happy Freelancing!