In the digital age, programming has become one of the most popular ways to make money. Some people start developing programs just for fun and over time, they find themselves turning that into a commercial venture. Does it sound familiar to you? If so, then, you might face an issue of how to formalize your business. 

Most likely than not, you choose between a sole proprietorship and a limited liability company. Which is a better option for programmers? Let’s help you pick the correct answer. 

What Is a Sole Proprietorship?

This form of private enterprise is a so-called disregarded or unregistered entity that requires no state filing. Once you start doing something for money and pay statutory charges and taxes, you become a sole proprietor. As the name suggests, you are the only enterprise owner. This business structure is widely favored by startuppers, freelancers, and those who work from home or online. At the same time, it’s a great match for newly formed small offline businesses too. 

Though an unregistered business structure and not a formal entity, a sole proprietorship still allows you to hire employees and make use of other services available to legal entities such as DBA filing or trademarking. 

Top Benefits of a Sole Proprietorship for Programmers

To help you understand if this form of the venture is good enough for your programming endeavors, here are the key advantages you will enjoy:

• No formalities to handle: Since a disregarded entity needs no filing, there is no serious paperwork to process and submit to state authorities. You might just need to register for a license to support your professional activity, with no other filing formalities to observe;
• You are the only one in control: You are the only enterprise owner, and you are in full control of your venture. You are the one to decide and do what you deem necessary, and you are the one to gain all profits; 
• Pass-through taxation: All business-related profits and losses should be reflected on your individual tax report, thus, saving you the need to file a corporate tax report and comply with any additional tax requirements;
• No annual state filings: While legal entities are to submit state reports on an annual basis to maintain their company info in the state registries up-to-date, disregarded entities don’t have to follow that rule and keep in mind yet another formal deadline.

Sole Proprietorship Tax Benefits and Options for Programmers

A taxation system is the biggest draw of this business form. On the one hand, you are considered self-employed and will have to pay a self-employment tax, which is not as low as you want it to be.

However, that pricy charge is more than justified by other tax benefits you’ll get. Thus, you’ll get an opportunity of reducing your taxable earnings by deducting certain enterprise expenses (for example, the use of your home or vehicle for business purposes). You’ll be also allowed to write off travel, entertainment, or marketing costs and get access to special retirement plans. 

Such taxation opportunities are welcoming for beginner programmers who seek to save on expenses and cut down the costs to the minimum. 

What Is an LLC?

Unlike a disregarded entity, an LLC is an incorporated form of business that calls for state filing. As a result, you’ll get a separate business entity with its own legal framework independent of the enterprise owners. Speaking of which, while a sole proprietorship belongs to a single owner, LLCs can be owned by a single person or multiple persons. 

To continue, the number of LLC co-owners is not limited which makes it a perfect structure for small and growing businesses alike. You might start your venture alone and engage more partners on the way. This way, you get some leeway as to how to expand your enterprise or bring in added capital when it’s necessary.
​​If you are interested in creating an LLC, we recommend reading the detailed guide “How to start an llc” from LLC.Services

Top Benefits of an LLC for Programmers

The bigger your venture becomes, the higher profit you get and the higher risks you’ll have to face. If you start your programming business as a freelancer and think about setting up an LLC when getting to a higher business level, this formal structure has more than one benefit to offer:

• Liability protection screen: LLCs exist as independent entities that are not legally associated with their owners. Hence, as an owner, you won’t be personally liable for any business debts, financial or property-related problems, and lawsuits. Likewise, your own funds and property won’t be used to settle company issues; 
• Pass-through taxation: With an LLC, you’ll still enjoy the pass-through taxation of a disregarded entity. By paying business taxes on your individual tax return, you won’t have to pay a corporate income tax and avoid double taxation;
• Better market credibility: Operating under an LLC umbrella, you’ll look more professional and trustworthy on the market and in the eyes of potential customers, which is an especially big plus for newcomers;  
• More financing opportunities: Banks, credit agencies, and other financial organizations are more eager to give funds to registered legal entities. The same is true for investors that consider legal entities more reliable than unincorporated entities. 

LLC Tax Benefits and Options for Programmers

As stated above, while getting a separate legal entity like a corporation, you can still reap the benefits of pass-through taxation and pay business taxes at your personal tax rates. Thus, you avoid your profit being taxed twice. 

At the same time, though, LLCs boast taxation flexibility and allow you to choose an optimal taxation scheme. You can elect an S-Corp tax status for your business. You’ll be exempt from a self-employment tax and will be able to optimize other taxes to match growing business needs and growing profits.

Why a Sole Proprietorship/LLC May Not Be the Best for You?

A sole proprietorship will leave it all to you. You’ll be the one to gain all profits and you’ll be the one to tackle all legal and enterprise-related problems too. And it’s not only about your personal involvement but also about your own assets that could be legally seized to offset your enterprise debts and liabilities. 

With an LLC, there will be more formalities to handle both at the formation and at post-formation stages. However, the liability shield and tax opportunities you’ll get are well worth the hassle. 

Consult With a Business Professional

Before you make a final decision on which enterprise structure is better for your programming business, we strongly recommend that you consult with an experienced advisor and a tax expert. They will explain all the legal and taxation nuances to you and help you choose the legal framework that will best work for your individual situation. 

Conclusion

All in all, both enterprise forms have their own pluses and minuses. However, until you start making a high profit and need some sort of side financing, a sole proprietorship will get your smaller venture covered. However, once your business appetite increases and your enterprise grows to a higher level of income and complexity, think about switching to an LLC.