Being a freelancer is so exciting and gives you the type of freedom you just can’t match by being a traditional employee. But working for yourself also comes with formalities and responsibilities that people aren’t always prepared for. Freelancing requires serious dedication and comes with a host of legal requirements that are essential to running a legitimate and successful business.
One of the questions that every freelancer inevitably asks is whether he or she should incorporate and, if so, when. While everyone’s situation is different, the short answer is that you should strongly consider incorporating as soon as you’re freelancing for more than 25% of your time working or your revenue.
When to Incorporate
If you’re just dabbling in the freelancing world and you’re making about 20% or less of your income from it, then it might not be necessary to incorporate just yet.
But if you’ve decided to dedicate yourself to freelancing on a regular basis, it’s time to incorporate. Full-time freelancing means full-time exposure to liability and the potential for a significant income stream from your freelancing work. Just like with any other job, you’ll want to take advantage of the protections and tax advantages that are available to you, and most of those only come with treating yourself as an official business. The same is true if you’re only freelancing part-time, but still making a substantial amount of money from your freelancing work.
Why You Should Incorporate Early
Incorporation offers freelancers a number of benefits and protections that aren’t available to the average individual. Two of the biggest reasons why most freelancers choose to incorporate have to do with personal liability protection (making sure their personal assets aren’t at risk) and favorable tax treatment.
Whether you opt to form a single-member LLC or another form of corporation, one of the key advantages is that it helps to protect your personal assets should your business owe money. If you choose to operate simply as a sole proprietor rather than forming an official entity, there is no separation between you and your business when it comes to financial obligations.
Simply put, that means that if your business gets sued, fails to pay its bills, falls short of any other financial obligations, or is in any sort of dispute, you are personally liable. Your personal assets can be accessed to pay off your business debts or any legal liability, because there is no formal separation between you and your business.
If you incorporate, on the other hand, only your business assets can be used to pay off your business debts, but your personal assets generally cannot be touched.
Is Having Insurance Better Than Incorporating?
Freelancers often think that having general liability insurance is enough to protect them. On the contrary, insurance will pay some portion of your defenses if you’re sued, but it does not shield your personal assets.
That is why freelancers find the protection from liability to be a compelling reason to incorporate. Particularly if you’re in a line of business that is susceptible to claims of negligence or other forms of liability, it’s wise to protect yourself and your personal assets as soon as possible. If you have to choose between getting general liability insurance or incorporating, incorporating would be the first step. But it’s best to do both.
Let’s be honest – no one enjoys paying taxes. Unfortunately, though, there’s no way around it. Paying self-employment taxes is a fact of life for freelancers.
Incorporating, whether as an LLC or a corporation, is a popular way to minimize self-employment taxes. Corporations are taxed differently than individuals, and claiming business expenses for your corporate entity can help to offset the amount of self-employment taxes you legally owe. Alternatively, forming or choosing to be taxed as an S corporation allows you pay yourself a salary that’s separate from your business profits, and only the salary will be subject to self-employment tax.
Even for the most business-savvy individuals, tax questions can be complicated and confusing. Consulting a tax professional is the best way to make sure you’re meeting your legal obligations while finding a business structure that’s the most beneficial for your situation.
Tax benefits and liability protection are just two of the reasons that freelancers should consider incorporating sooner rather than later. Incorporating as an official business can also make you seem more legitimate and instill confidence in potential clients. Anything that boosts your credibility is good for your business.
At The Gouchev Law Firm in New York, we work with businesses of all sizes, including freelancers, start-ups, and franchise businesses. Call us at (212) 537-9209 or schedule a free strategy session today to see what The Gouchev Law Firm can do for your business.
The above information is for educational and informational purposes only, and is not a substitute for an attorney's advice. Please consult a licensed attorney in your area with specific legal questions or concerns.