Understanding the Difference Between a Self-Employed Business and a Self-Employed Professional

The terms self-employed business and self-employed professional are often used interchangeably, but they actually refer to different ways of operating a business. This article aims to clarify the key differences between these two concepts, focusing on their definitions, examples, and the structural and operational differences.

Self-Employed Business

Definition: A self-employed business pertains to individuals who operate a business that typically involves the production or sale of goods or services. This often includes managing and growing the business, which may involve hiring employees or contractors.

Examples

Small business owners Freelancers who sell goods Entrepreneurs running a startup

Focus

The primary focus is on managing and growing the business, which encompasses various aspects such as marketing, sales, and operations.

Structure

Such a business may involve formal business structures such as sole proprietorships, partnerships, or limited liability companies (LLCs).

Self-Employed Professional

Definition: A self-employed professional refers to individuals who offer professional services often based on their expertise or qualifications. Unlike a business owner, professionals typically do not manage a business with employees.

Examples

Consultants Freelancers in creative fields like graphic design Independent contractors in areas like accounting or law

Focus

The emphasis is on providing specialized services, often relying on personal skills and knowledge rather than managing a larger business.

Structure

While such individuals often operate as a sole proprietorship, they may also be structured as LLCs or other entities depending on their profession.

Key Differences

Nature of Work: Business owners focus on broader business operations, while professionals concentrate on delivering specialized services. Scale: Self-employed businesses may scale up with employees and more extensive operations, whereas self-employed professionals typically remain solo or small-scale. Client Interaction: Professionals often build client relationships based on their expertise, while business owners may engage with a broader customer base.

Business Registration Considerations

Whether you are a self-employed business owner or professional, there are several registration considerations to keep in mind.

Operating Using Your Name Only

No registration is required for operating a business using your own name only. However, the business is still considered a separate entity for legal and tax purposes.

Locally Named Business

Operating a locally named business may require registration at least at the county level, particularly for opening a bank account in the name of the business.

State Registered Business

It is highly recommended to register as a limited liability company (LLC) for modern business operations, although some individuals may opt for a sole proprietorship. The LLC provides useful legal protections.

Tax Filing Options

In terms of tax filing, a self-employed person can file as one of two types of legal entities:

Sole Proprietor

A sole proprietor can file using schedules C and D attached to their 1040 return.

Subchapter S Corporation

Choosing to file as a subchapter S corporation, with you as the single and only shareholder, is a pass-through taxation vehicle. This means that the profits of the corporation are not taxed at the company level, but instead are passed through directly to you, similar to a sole proprietorship tax return.

Special circumstances may require filing as a subchapter S corporation, as this structure can offer tax benefits and legal protections.

Conclusion

In summary, while both self-employed businesses and professionals are forms of self-employment, they differ significantly in their focus, structure, and the nature of their work. Understanding these differences is crucial for individuals who wish to operate a successful and legally compliant self-employed business or professional venture.