Open Thread: Is Your Freelance Business Incorporated?
Posted November 10, 2008 in Business, Open Thread 13 Comments »
A few of us have been having a discussion in the forums about the value of freelancers being official and creating a corporate entity like an LLC or S-Corp.
On the positive side, having a corporation limits your liability for anything the business does, and gives you some (but not complete) protection from lawsuits.
Incorporating is also thought to make the IRS less likely to audit your business tax deductions, and depending on where you incorporate it might save you some money on taxes too. For international readers, this will of course vary by country :-)
The negative side of incorporation is that you will have additional paperwork every year, and it does cost money up front. Depending on how and where you file your taxes, it may also be more expensive on a yearly basis. The big question is: do these negatives outweigh the benefits?
So, are you incorporated?
If you aren’t, how come?
If you are, what type, and what have you found?
About the author: Mason Hipp is an entrepreneur, marketing guru, and writer. He blogs about life and business at FreelanceFolder.com and is co-author of the Book The Unlimited Freelancer. Follow him on twitter @MasonHipp
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13 Comments
David Hepburn
November 10th, 2008 at 12:34 pmI made the decision back in April 2008 to incorporate. My company is now an S-Corp, and I love it for a lot of reasons:
1) My number one reason is that it gives my business a more professional appearance. I am able to do business with other businesses without having to fill out 1099 forms, etc. Clients feel safer doing business with a real company and not just an individual.
2) As you already mentioned, it limits my liability and gives me greater protection from potential lawsuits (although I hope I never have one!).
3) I am only taxed once (S-corp vs. standard C-corp)
4) I am only taxed on my profit (any purchase I make for the company is a write-off)
There are lots of great reasons, and these are only a few. I think for someone who is considering being in their freelance career for the long-run, it’s definitely worth incorporating.
C Wylie
November 10th, 2008 at 12:50 pmI just met with a CPA today about options for this. I believe I’m going to go with an LLC b/c it offers the option of filling as an S-Corp for the first year. I do not exactly understand all the details just yet.. but as was stated above, I want to instill that professional confidence in my clients, and remain protected legally.
James Chartrand - Men with Pens
November 10th, 2008 at 2:39 pmNot incorporated yet because I’m Canadian and it’s a big bloody damned affair with no LLC cheats in between. (sigh) Very expensive, accounting wise, difficult to maintain and means a lot of work for me, the man of many hats.
But I’ll have to. In fact, I was told to. By my accountant. Not good, that!
Mason Hipp
November 10th, 2008 at 2:59 pm@David — I think you entirely summed up my personal thoughts on the matter. For the same reasons as you, My business is incorporated as an S-Corp.
@C Wylie — An LLC is a good way to go, it is easier in many ways than a full-blown corporation and offers much the same benefits. And it’s always good to listen to your accountant :-)
@James — You aren’t incorporated yet!? Well, you’d better listen to that accountant of yours :-)
Matt Tuley, Laptop for Hire
November 10th, 2008 at 5:17 pmI set up shop as an LLC because:
1) it offers a level of protection–which, as a writer, I’m not too likely to need, but why risk it, especially since…
2) it was easy and not too expensive,
3) figuring taxes is straightforward and the hit only happens once (vs C-corp),
4) it enhances my professional image, making hiring me an easier sell for some of my larger corporate clients.
So, basically, what David Hepburn said, but for a different legal structure.
CheekyMonkey
November 10th, 2008 at 9:24 pm@James: Any conversations I have had with Revenue Canada have indicated that if you earn less than $34K from your freelancing you are not required to incorporate. For those Canadian moonlighting freelancers who already pay the tax man from their full-time gig this is excellent. That being said, I would definitely take your accountants advice over mine, especially if freelancing is your full-time operation in which case you would likely cross that magic money threshold.
James Chartrand - Men with Pens
November 10th, 2008 at 9:29 pm@ Cheeky – You’re not obligated to incorporate under any circumstances whatsoever. It’s optional. Your earnings are irrelevant.
However, considering we have a six-figure business, it makes incorporation a *smart* thing to do. I know I have to. Just not looking forward to it, as it’s a yearly expense, a headache and a mess to navigate. Ugh.
milo
November 11th, 2008 at 4:04 amApplied GmbH, german model similar to LLC.
Allows to license and distribute your products in various markets worldwide.
1955 Design
November 11th, 2008 at 11:02 amI am a registered LLC in Michigan. Although I don’t understand the nuances nor the legal differences between an LLC and a Corporation, I can say that I have *never* been sent a 1099 by a client.
What am I missing?
Justin - YGG
November 11th, 2008 at 11:09 amWe are incorporated, it makes things a lot cleaner as far as ownership and its not tied to me personally for legal reasons. We also own the brand as well, extra protection.
Melek
November 11th, 2008 at 11:43 amI finally hired a CPA last year and he encouraged me to form an LLC instead of what I currently was, a sole proprietorship. He also said that I needed to start using payroll to pay myself (I don’t have any employees). If you form an LLC and don’t get a paycheck, it’s a HIGH audit area for the IRS. So keep that in mind. I don’t have to pay estimated payments anymore, but, I will owe a lump sum at the end of the year, even tho some taxes are taken out from my pay check.
He also suggested I setup an Individual 401K, which was simple to do at Fidelity. As an LLC, i can now contribute employer money AND individual money into my 401K. That means, i can contribute MUCH more (Up to 24k I believe) than i could in a SEP IRA (only about $14k or so?).
At the end of the year when the CPA did my taxes, he ran the numbers on what I would have owed as a SP and what I owed as an LLC. I saved about $7,000!!
I feel much *safer* being an LLC. Like I have some form of protection…or at least more than I did as a SP. Also, having a CPA do my taxes is a HUGE burden lifted off my shoulder. One, bc I don’t have to spend the time doing them, and two, bc he actually knows what he’s doing! :)
Dobes Vandermeer
November 15th, 2008 at 8:16 pmI’m in Canada and I incorporated my freelancing business (before I switch to making online accounting softwre) because there was a good savings on taxes. Here there is a flat 18% corporation tax until your corporate income exceeds $250k. Self-employment income follows the same sliding scale as employment income, so at some point it can be a lot more than corporation income tax. If you pay yourself using dividends, they are taxed differently than employment income, too, so you can save your accountant’s fees in taxes. You do have to earn ~$75k or more to benefit from this.
The liability issues were never a big deal for me, usually that’s all included in the contract anyway.
tiernan
May 21st, 2009 at 12:46 pmAs Dobes said in Canada there is about a $75k threshold before you save money on taxes by incorporating, is there an equivalent number in the US?