What’s the difference between a sole proprietorship and an independent contractor?

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There are a lot of questions from clients about sole proprietorship and independent contractors. A very valid question and they always ask me like, What is the difference between a sole proprietor and an independent contractor? It is necessary to clarify what both mean when it comes to taxation and other matters.

What is the sole proprietor?

 Let’s take about the first one, the sole proprietorship. A sole proprietor is a one-person business that has not registered with the state as a business entity. He is the only owner of his business, and he can do whatever he wants to do. It is a wide range of business, and he can start any business under the flag of a sole proprietorship, like a corporation partnership or LLC. So, in other words, a sole proprietor is the default business type for income tax purposes. If you start to build a business and count the business expenses and income separately from your expenses and income, you do nothing to register with your business. In your state, you are considered a sole proprietor.

So the default way of doing work or business when you alone fall in terms of a sole proprietorship. In this form of business, the liability is not limited, and you will be liable to all of your assets.

Disadvantages of a sole proprietorship

One of the significant disadvantages of a sole proprietorship is that you have no legal protection. If you face bad times and financial issues in your business, this will not protect you financially. You will have to pay all the debts as you owe as sole proprietor until they are completed. One thing you must clarify that all the debts must be paid until a single penny left. For this purpose, some time a sole proprietor has to sell his house and other valuable assets. 

Independent Contractor

The term independent contractor is a little bit different from a sole proprietorship. Though they are working and form the outer surface, they look like the same.

In an independent contractor, you work as a contractor. Different kinds of tasks and services are provided based on agreements and terms and conditions. The independent contractor field is a little bit narrow as he only provides services. He does not generate or produce anything new in the market instead of selling and working for others. You can see a contractor makes an agreement that is based on some specific terms. The working criteria are based on the contract between the contractor and the customer.

In an independent contractor, there are some essential elements you will find, which are as follows.

  • Making a contract between the service provider and customer
  • Determination of a time limitation of contract
  • Sections about working details
  • Payment details

These are the essential elements of a contract. Once the contractor completes his task, he will no longer be liable to work for such customers until further agreement.

Disadvantages of independent contractor

The significant disadvantage of an independent contractor is the liability. It is the same as the sole proprietorship. There is no LLC available in an independent contractor. So the contractor” s liability is unlimited.

The second disadvantage is related to tax. He has to pay more tax as compared to a sole proprietorship and to pay as he makes a contract with the customers. He is liable to pay tax with every new agreement like with-holding tax services tax and personal income tax.

What you should do be an independent contractor or sole proprietor

Most people get confused the what should be? Both the sole proprietor and independent contractor have looked the same. As we discussed above, there are differences between both of the terms. So we have made it easier for you to decide. But if you are still thinking about it and not able to decide. Let me help you.

If you want to work by yourself and are interested in doing all the tasks by your hand, the field of a sole proprietorship is the most suitable for you. Study shows that 40% of people do not trust the others’ work. Instead, they like to do by their hands. This is because that they want to do their best work upon it. So the sole proprietorship is a good option.

The independent contractor is different from this. A contractor can hire people to do the task, and he can only supervise the work. This is an easy task. You will have to keep an eye on the people you have hired to complete your agreement. So we can say that an independent contractor is a good option for the people who want to supervise the work only.

So now we are sure you have come up with some kind of solution.

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