How to Set Up a Business Entity as a Freelancer

A business entity offers important legal protections that safeguard your personal assets, as well as tax benefits that can help you take your freelance business to the next level.

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If you have a side hustle or run a small business full-time, it may be time to start thinking about setting up a business entity. Though it may seem like just another fee to pay or form to fill out, a business entity offers tax benefits, legal protections, and greater legitimacy for your growing business. Fortunately, the process of setting up a business entity is fairly straightforward.

In this article, we’ll explain the differences between each type of business entity and help you decide which option might be right for you. Then, we’ll explain how to set up a business entity as a freelancer.

Table of contents

Which business entity is right for you?

There are four main types of business entities, each with its own set of pros and cons. Here’s what you should know about each option.

Sole proprietorship

This is the default option for entrepreneurial business ownership, making it the most common business entity for new freelancers. You don’t need to register with the state to become a sole proprietor. As long as you’re making money on your own, it’s automatic.

However, when you’re a sole proprietor, you and your business are treated as one in the same by law. This means your business profits and personal income are lumped together on your personal tax returns. It also means that if someone decides to sue your business, they could take your personal assets, including personal bank accounts, your home, or your car.

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A limited liability company (LLC) is a middle ground between a sole proprietorship and a corporation. You can set up an LLC even if you don’t have any employees, or you can set one up with multiple business owners.

Unlike sole proprietorships, LLCs are treated as their own legal and tax entity—meaning your personal assets won’t be taken from you if you are sued. Under the name of your LLC, you can buy property, set up bank accounts, apply for loans, and more.


S corporations and C corporations are the most complex and expensive types of business entity. This option is typically reserved for medium-to-large, well-established companies—although even a one-person business can be a corporation. The main difference between the two is taxation. In short, C corps are taxed twice through corporate income tax and federal income tax. S corps shareholders don’t have to pay corporate income tax.

Like an LLC, corporations have limited liability when it comes to corporate debts and lawsuits. If you’re looking to bring in outside investors or issue stock to employees, a corporation could be the best option. Keep in mind that corporations are also more difficult to form and maintain, since they require business directors, officers, and shareholders.

Fortunately, LLCs offer the same legal and tax benefits of a corporation at a more affordable rate.

How to set up your business entity as a freelancer

If you’re a freelancer, your business is  automatically a sole proprietorship. If you would rather set up an LLC or corporation, you’ll need to fill out the appropriate forms and pay certain annual fees. Here’s how to set up a business entity as a freelancer.

1. Submit paperwork

The first step to setting up any business entity is to fill out the proper paperwork. You’ll need to fill out an Articles of Organization form to set up an LLC or an Articles of Incorporation form to set up a corporation. You can obtain these forms via your Secretary of State’s office or through online legal companies such as LegalZoom (these companies do charge a fee to submit the paperwork for you).

2. Obtain a business tax ID

If you’re a corporation or an LLC with employees, you’ll also need to set up a business tax ID, also known as an employer identification number or EIN, which allows the IRS to track your business for tax records. Applying for an EIN only takes a few minutes and can be done directly though the IRS website.

3. Set up a business bank account

Once you’ve set up an LLC or corporation, your business earnings and losses are recognized by the government as separate from your personal finances. However, you’ll still be at risk of liability unless you set up a separate business bank account. Creating a business bank account will also make it easier to track your finances and file taxes. Still not sure if you need a business bank account? We made a guide for you to help you decide.

4. Get business insurance

Though LLCs and corporations offer certain legal protections, it’s smart to add another level of protection by getting business insurance. This type of insurance will protect your business in case of losses due to natural disasters, data breaches, and more.

5. Pay your taxes

As a small-business owner, you aren’t required to withhold taxes from your earnings. Instead, you’ll need to pay your estimated self-employment taxes and income taxes on a quarterly basis. When it comes time to file your tax return, you may need to pay additional taxes, or you might get a refund if your estimates were greater than your actual taxes. We recommend you get a professional to help you sort it out, because it can be confusing, especially if it’s your first time.

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6. Maintain your business entity

Now that your business entity is up and running, you’ll need to maintain your status by following the laws specific to your state. If you’re doing business in a state other than the one in which you registered your entity, you’ll need to follow the laws of both states. Most states require you to pay an annual fee and taxes in order to maintain an LLC or corporation.

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The takeaway

Though setting up a business entity may seem like another daunting task, it can be well worth the effort. The process is pretty straightforward, and perhaps most importantly, it provides important legal safeguards and tax benefits that protect your personal assets if you’re ever sued.

Would you like to learn more about running a business as a freelancer? Check out for the 10 Best Checking Accounts for Freelancers 2022.

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How to set up a business entity as a freelancer FAQ

Can you start a business as a freelancer?

Yes. As a freelancer or independent contractor, you are automatically considered a sole proprietor. This is one of four business entities recognized by the government. You also have the option to change your business entity to an LLC, C corporation, or S corporation, which each have different tax benefits and legal protections.

Can I start an LLC as a freelancer?

Yes, you can start an LLC as a freelancer—even if you don’t have any employees. To do so, you’ll simply need to fill out an Article of Organization form and file it with the government. You can get this form from your state’s Secretary of State office or by filing a fill-in-the-blank form from an online legal company like LegalZoom.

Do I need an LLC to be a freelancer?

No, you do not need an LLC to be a freelancer or independent contractor. However, if you’re hiring employees or generating a significant income, it might be smart to do so. An LLC offers legal protections that separate your personal assets from your business, meaning that a client could never sue you and take your home, car, or personal savings.

Do I need a business name as a freelancer?

It depends. You do not need a business name if you’re acting as a sole proprietor (which is the default status of any freelancer or independent contractor). However, if you decide to file as an LLC, C corporation, or S corporation, you will need to choose a business name when filling out the paperwork.


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Brooke Kunz
Written by
Brooke Kunz
Brooke is a copywriter and artisan ice cream enthusiast dwelling in California's sunny Central Valley. She's happiest when hiking in the backcountry, baking an overly complex cake recipe, or reading an engrossing new memoir.
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