To incorporate or not to incorporate as a freelancer
So you want to work for yourself? AMAZING! Congratulations on making a fantastic decision.
But do you actually need to formally incorporate a company, and what does that mean?
For most freelancers, the answer is no, you don’t need to incorporate, with a few exceptions:
- You want to ensure if your business goes bust, your personal assets are protected
- You plan to get outside investors
Pro: No setup
Con: If the business is sued, they can take your personal assets
Most freelancers operate as sole proprietorships. All this means is that you are the sole owner of your business, and your business and personal assets are considered the same. You can hire employees or other contractors.
The biggest tax consideration here is that you track all of your business expenses from day one and subtract this from your income. You will only pay tax on your profit, so this will reduce your tax bill.
Limited Liability Company (LLC):
Pro: Personal assets are protected from business liabilities, and there are fewer record keeping obligations compared to an S- or C- corporation
Con: $50–500 to incorporate + annual fees of $300–500 (differs based on state fees)
For an LLC, you choose whether you’re taxed as a sole proprietorship or corporation. If you’re doing a risk activity (E.G Health and safety advisor, Advising on investment deals, creating complex software, etc.) you may want to create an LLC, as if there is a legal case — it’s the corporation, not you as an individual who is taken to court. This is an important difference — as your personal assets (your car, house, savings) cannot be affected by the court case. If you were a sole proprietor, this would not be the case and your personal assets could be affected.
For the cost-conscious freelancer who doesn’t expect to get sued, an LLC is probably not the best path.
Pro: Can take on multiple outside investors (up to 100 members), do not pay self-employment tax on non-income business profits (only relevant if business profits are greater than what a reasonable salary would be for you)
Con: $200–800 registration fee + $100 — $800 annual fees, more record keeping required
This is very unlikely to apply as an independent worker. However, if you’re looking to create a company and grow it quickly you should consider an S corp to ensure you can bring on investors.
Unless you’re looking to have over 100 external investors, this is an unnecessarily complicated corporate structure, unless you’re looking to create the next Apple! Also, with C Corps, you are taxed twice:once on your business profits and again on your personal income.