After freelancing in the fashion industry for 15+ years and working with hundreds of FAST students – I can tell you this:

You do not need to set up an LLC or S-Corp when you’re first starting out.

That said, I’ve done both of the latter. I started my freelance career as an LLC (Limited Liability Company). Then, once my income reached a certain level, I became an S-Corp – and saved thousands of dollars on taxes. And I’ll share everything I learned in this guide.

Quick Disclaimer:  I am not a trained or certified legal professional or accountant, and none of this is to be deemed legal or financial advice of any kind. But it is the stuff I wish someone had explained to me back when I was getting started.

The Different Types of Business Entities for Freelance Fashion Designers

• Just starting out? A sole proprietorship is totally fine.
• Want some legal protection? An LLC is your easiest next step.
• Making $40–50K+/year? An S-Corp might save you serious money on taxes.

Depending on what state you live in, an LLC is usually your quickest and easiest option to set yourself up as a business and create a little legal protection. Do some googling for your state, and you can likely set this up online in an afternoon for a small fee (here’s a full run-down of LLC filing and report costs by state).  

An S-Corp will provide more tax benefits, but when you’re just starting and not earning a lot yet, the setup and ongoing fees probably aren’t worth it. Once you hit $40-50,000/year in income, it can save you enough in taxes to be worth the cost.

If you decide to set up an S-Corp, I recommend getting professional help. Back in 2012 and 2016 when I set up mine, I hired a CPA and lawyer. Now, you can use one-stop online services to do the same thing for way less. I’m not an affiliate for any, but if you google “set up s-corp for freelancer,” many options will come up.

Sole Proprietorship

The simplest option as a freelancer is operating as a sole proprietorship. This means that you’re running your business as an individual – no separate legal or tax structures needed, and everything goes through your personal annual tax returns. You can get started right away without any formal paperwork, but remember, this also means personal liability for all business debts.

Pros and Cons of Sole Proprietorship for Freelancers

Easy to Set Up

With no need to file complex paperwork or pay steep fees, you can quickly get your business off the ground. You literally just start freelancing and can funnel everything through your personal accounts and social security number.

Taxes Are Simpler But Higher

On one hand, tax time is simpler because business profits are treated as personal income. But this also means potentially higher taxes compared to other entities like an LLC or S-Corp.

There’s A Lot of Liability

If something goes wrong in your freelancing venture – say a client sues you over design copyright issues – then guess who’s responsible? That’s right: YOU. Your personal assets (house, car, etc.) could be at risk if things go south since there’s no separation between owner and business in sole proprietorships.

Pro tip: I have never been sued, nor do I know a freelancer who has been sued, but anything can happen! As a freelancer, do the right thing, be ethical, and if something feels shady, back out.

Limited Liability Company (LLC)

An LLC separates personal assets from professional ones – a safe move if you want protection against lawsuits or debts tied to your freelance work. Forming an LLC requires filing paperwork with the state where you’ll be doing most of your work but offers peace-of-mind benefits.

(There are such things as single-member LLCs and multi-member LLCs, which I won’t go into in detail. Basically, it’s the difference of whether the LLC is just you as an individual person or if there are multiple LLC members – maybe you and your spouse or business partner.)

Pros and Cons of an LLC for Freelancers

You Get Legal Protection

An LLC offers protection from personal liability. If something doesn’t go as planned in the business, it won’t be connected to you individually but rather to your organization entity.

You Get Tax Flexibility

You get some say on how you’d like to be taxed when operating under an LLC. You could choose pass-through taxation or corporate taxation depending on what suits your financial situation best.

There’s Some Paperwork

To start, there’s more paperwork involved in setting up and maintaining an LLC compared to sole proprietorship. But, it’s usually not much. Depending on your state, it’s likely a few hours once a year. Personally, I would not let this be a reason *not* to choose an LLC!

There Are Costs

Forming and running this type of business structure may require paying certain fees which vary by state. Also consider annual report fees that are typically associated with maintaining the status of your company as well. However, the protection and tax benefits you get will likely outweigh any costs for an LLC. 

Here’s a full run-down of LLC filing and report costs by state (varies drastically!).

S-Corporation (S-Corp)

Last up is an S-Corp status. My personal favorite! An S-corp isn’t technically a type of business structure – it’s more like an optional ‘upgrade’ that allows corporations (and some other entities) certain tax advantages. Again, it can save you a lot of money, but it usually doesn’t make financial sense until you’re earning $40-50,000 or more a year.

The Pros and Cons of an S-Corp for Freelancers

You may have heard other freelance fashion designers talk about S-Corps. It can get confusing! For example, you can operate as an LLC but file taxes as an S-corp. It’s a great way to decrease paperwork but still get the tax benefits. If you want to go this route, consult with your CPA or a trained professional because I won’t be diving into the logistics!

Big Tax Advantages

An S-corporation (S-corp) gives your business superpowers in terms of tax benefits. As an owner, you’re considered both an employee and a shareholder. This lets you split your income between salary and dividends – effectively lowering your self-employment taxes. It can save you A LOT of money. 

On a $100,000/year freelance salary, you can save upwards of $6,000+ on taxes alone by filing as an S-corp. YEP!

You Are Personally Protected

The S-corp structure offers limited liability protection which can be crucial if legal issues ever arise. You as an individual are protected from any work you do through your business.

There’s Some Paperwork

Setting up an S-corp means more paperwork than a sole proprietorship or LLCs. Plus there are ongoing administrative tasks to handle each year – think annual reports and corporate minutes. 

Pro tip: Once it makes financial sense to operate as an S-corp, the financial tax advantages can often be enough that it also makes financial sense to outsource the filing and paperwork. I have never handled my own S-corp logistics!

Ownership Restrictions

Usually never an issue for freelance fashion designers, one major drawback is ownership restrictions: You cannot have more than 100 shareholders in an S-corporation. Your freelance business, even if you grow it into a small agency (like many of my FAST students have done, including Connie Bourgeois, who now has a team of 6!), will likely never run into this problem. But it’s something to keep in mind. (Also worth noting is that non-US citizens/residents can’t be owners.)

Getting Set Up: EINs, Bank Accounts, and Business Names

Sole Proprietorship vs Business Entity

A sole proprietorship, in essence, means you are your business – there’s no separation between personal and professional assets, and all finances run through your personal tax return.

The alternative is setting up a business entity, something like an LLC. This creates some distance between you as a person and your freelance work, and for tax purposes, setting up a biz can make a lot of sense.

EINs & Separate Bank Accounts

An EIN (Employer Identification Number) isn’t mandatory unless you decide to form an LLC or other corporation type. But having one could simplify things with clients who might prefer working with a “business” rather than an “individual.”

Whether or not you formalize into a specific structure, it can make sense to have separate bank accounts for professional income/expenses versus personal ones. This will make tracking finances and your business income simpler come tax season. 

State Registration

State registration is a good idea if you’re using any business name other than your own legal one. This is often known as an “assumed name,” “DBA” (Doing Business As), or “trade name.”  It depends on where you live, but just google for “register trade name in [state]” to figure out how. In most states, you can do it online for a small fee. 

Pro tip: In 15+ years freelancing, I always operated as a business (LLC, then S-Corp), but no client has ever required an EIN—and the same goes for my hundreds of FAST students (that I know of). But, many freelancers feel a mindset shift once they get an EIN or open a separate bank account. It helps you take your business more seriously. Just be sure to choose a bank with no fees and no minimums—big banks like Chase often have hidden costs, so check out local banks or credit unions. I’ve used a credit union for years and never paid a single fee.) 

What Business Entity is the Best For Freelance Fashion Designers?

Sole Proprietorship: Simplicity but Limited Protection

In a sole proprietorship, profits and losses pass directly through to your personal tax return. This simplicity is appealing, but it leaves your personal assets exposed if legal issues arise.

LLC: Balance between Liability Protection and Tax Flexibility

Forming an LLC shields your personal property from potential lawsuits related to your freelance business. However, this protection isn’t free – there are setup costs and ongoing state fees involved.

S-Corp: Potential Tax Savings with Increased Complexity

If you are willing to handle more paperwork (you can always use a service to do this for you; I have never managed my own!), becoming an S-corporation might be worth it because it lets you save on self-employment taxes in some cases.

Pick a Business Entity and Start Freelancing!

I talk to way too many freelance fashion designers who get stuck here, not taking action just because they’re unsure about all this stuff. Don’t let this be a reason to stall.

My best advice? Pick something and get started!

That may be kicking off as a sole proprietor or forming an LLC. Unless you’re already making $40-50,000/year, an S-corp won’t make sense financially. 

You’ll be there in no time! And if you need help, check out my Step-by-Step Guide to Being a Freelance Fashion Designer.