Get started with the basics of Independent Contracting.
Introduction
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3 sections
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Introduction
Now that you have defined your product and customer profile you may be ready to register your business! In this section, we will review the different types of business structures and how to choose which is best for you. You will learn the difference between a sole proprietorship, a partnership, a corporation, and an LLC. We will also discuss the permits and forms you may need, and where to find them.
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Choosing Your Business Structure
Getting started as a business owner is a similar process for everyone, regardless of immigration status. Choosing your business structure will be the first decision you make when you register your business, as it will determine how you operate and how you are taxed. Deciding what kind of business structure you want to have depends on many factors, such as what kind of dream you’re bringing to life, how comfortable you are with risk, how big you want to become, or how quickly you want to grow.
In the following sections we will review the following legal structures: Sole proprietorship, general partnership, Corporation C, and Limited Liability Companies (LLCs), and Cooperatives (Co-ops).
Consider the following questions before making your decision:
- Legal liability: How risky is your business? If your business is generally risky, you may need the additional protection of an LLC or corporation.
- Tax implication: How are you going to pay your taxes and those of the business? Do you want to pay business taxes separately from your personal taxes?
- Costs: How expensive is it to start? Consider the $800 tax minimum for corporations and LLCs in CA.
Partners: Do you have business partners? How are you dividing ownership? Are you paying business taxes separately or together?
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Sole Proprietorship
In a sole proprietorship, the business owner and the business are one thing and there is no legal distinction between you (the owner) and the business.
This means you are legally liable for the business debts and legal proceedings of the business: your assets (car, house, and other personal property) also belong to the business.
In some cases, you may have to file a Fictitious Business Name (otherwise known as DBA: Doing Business As) with your local government agency. See permits section for more information.
In California, you may register your business as a sole proprietorship with your city/county. You can use your ITIN or SSN to register your business.
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Partnership
In a general partnership, also known as an Association, 2 or more owners engage in business together. Partners share all assets, profits, and financial and legal liabilities of their jointly-owned business.
Similar to a sole proprietorship, partners are responsible for paying their own taxes, including business earnings, on their income tax returns, as the business is not a separate entity.
In some cases, you may have to file a Fictitious Business Name (otherwise known as DBA: Doing Business As) with your local government agency. See the permits section for more information.
If you decide to register your business as a partnership, we recommend you create a contract with your business partners to have documented evidence of your agreement.
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Corporations
There are different types of corporations, the most common being a C-corporation.
In a C-corporation the owners, also known as shareholders, are taxed separately from the entity and C-corporations are responsible for paying their own taxes. This creates a form of double taxation, since earnings are paid at a corporate and personal level.
Because of the separation between owners and the corporation, the C-corp offers additional protection to limit the personal liability of its shareholders and employees. Therefore, the legal obligations of the business cannot become a personal debt.
In California, a corporation must be registered through the Secretary of State and it’s required to obtain local permits as well.
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Limited Liability Company (LLC) and Co-ops
Limited Liability Companies, also known as Limited Liability Corporations or LLCs, are hybrid entities that are a cross between a partnership and a corporation. LLC owners are referred to as “members,’’ and those members can include individuals, corporations, other LLCs and foreign entities. LLCs can also have just one owner. LLC regulations vary by state.
LLCs provide the liability protection of a corporation and the tax efficiencies and operational flexibility of a partnership.
LLCs do not pay taxes on their profits directly. Instead, the profits and losses are passed down to members, who report them on their individual tax returns.
In California, an LLC must obtain local permits, as well as register through the Secretary of State’s office.
Cooperative Corporation (Worker Co-Op)
- Members are both workers and owners.
- The members control the structure and practices of the work environment.
- Obligations are limited to the company.
- Tax rules vary from state to state.
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Permits
Registering your business can have many benefits. Some benefits might include tax benefits, accessing a business loan, and being able to submit work bids for large projects. Choosing an entity and incorporating your business may be the first step to registering your business. The permits you may need depend on the type of business you are starting. Here’s a list of popular permits at the state, county, and city level.
We encourage you to learn more about the permits you need and the costs associated with them, before you launch your business. Keep in mind, permits vary from state to state and at the local level.
State level:
- Generally, corporations and LLCs are incorporated (filed at the state level)
- Professional licenses, such as a barber’s license
- Seller's permit
County level:
- Fictitious Business Name, also known as a DBA (Doing Business As)
- Food facility permits
City Level:
- Zoning
- Business License (Business tax certificate)
In California, you can visit calgold.ca.gov to learn more about the permits you may need to launch your business. CalGold offers the possible permits you may need but it does not mean you will need all of them. For additional information on permits in your area, visit your local SBDC office.
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Contracts and IRS Forms
Contracts
Contracts are important as they protect both you and the person or business that has hired you. A contract is helpful because it defines the type of work you will provide and sets expectations for the work to be delivered. It also provides documented evidence of the agreement that you will be working as an independent contractor and not as an employee (which has different tax implications).
A contract allows both you and the hirer (your client) to think through key aspects of the working relationship, and makes clear additional provisions of the working relationship, such as keeping parts of the work confidential, making clear who owns the work product, how the contractor can talk about the project in their marketing, and many more arrangements.
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INDEPENDENT CONTRACTOR IRS FORMS
INDEPENDENT CONTRACTOR IRS FORMS
Here are 3 IRS forms you should be familiar with as an independent contractor.
- W-7: Individual Taxpayer ID Number (ITIN) Form
Use Form W-7 to apply for or renew an existing IRS individual taxpayer ID Number (ITIN). If you already have a social security number or if you qualify for one, you don’t have to apply for an ITIN. You can access the form on this page.
- W-9: Request for Taxpayers Identification Number and Certification Form
Form W-9 does not require employment authorization verification and you can use an ITIN or a SSN to fill it out. Independent contractors submit a completed W-9 to the clients who have hired them. At the end of the year, your clients will file this information with the IRS, and include information about how much you were paid. Access the form from this link.
- 1099: Miscellaneous Income and Form 1099.
Form 1099 is a summary of how much each individual client paid you in the past year. You should receive a 1099 for every W-9 you submitted if the client paid you more than $600 in the past year. You will use your 1099s to prepare your own federal and state income taxes.
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Resources
Contracts
RESOURCES
Here is a list of resources you can visit to help you get more information on the structure, permits, and registration specifics required to get your business started.
Sole Proprietorship
Partnerships
Corporations
LLC
- LLC, State of California Franchise Tax Board
- LLC, IRS
- Limited Liability Companies as Worker Cooperatives, Insight
Business Licensing and Permits
- Cal Gold (CA) - This website assists you in finding appropriate permit information for your business. It also provides contact information for the various agencies that administer and issue these permits.
- State Licenses and Permits, SBA
- Professional Licenses for Immigrants
Registering a Business Name
Below you’ll find some handy resources for getting started as an independent contractor.
Governmental Resources from the Internal Revenue Service (IRS)
- IRS Guidelines for Independent Contractor work
- Common Law Rules (IRS Publication 15-A, 2016 Edition)
- Application for IRS Individual Taxpayer Identification Number (W7 form)
- Request for Taxpayer Identification Number and Certification (W9 form)
- 1099 form for Miscellaneous Income
Working for Yourself Resources
