Small businesses drive the US economy, so tax laws are set up to give them incentives and rewards. If you are a self-employed freelancer, gig worker, or contractor, it’s time to evolve and take advantage of those benefits. Your success may depend on whether you transform yourself into a business.
There are several corporate structures suitable for self-employed professionals. Typically, and depending on the state of incorporation, they choose between incorporating as a Limited Liability Company (LLC) or S Corporation (S-Corp). Here’s what forming one of these entities can do for you:
1. Enhance your brand and increase your income.
When you’re a business, you create an image that projects legitimacy and authority. You’re more likely to attract new customers and clients than you are as an unincorporated freelancer, gig worker, or independent contractor. Pro tip: Businesses may prefer to do business with other businesses.
2. Protect yourself.
When you’re a legal entity, your personal assets are more likely to be safe from legal judgments. It’s the business – not you – that is generally responsible for damages and debts. This allows you to work without worrying you might lose your home, car, or personal savings because of a business liability resulting from something like a data breach, damaged product, or bad consulting advice. Pro tip: Once you’re involved in a lawsuit, it’s too late to form a business to protect your personal assets.
3. Access more money.
Lenders generally prefer an incorporated business as they see it as a safer bet. Pro tip: Banks sometimes hesitate to provide a loan to a sole proprietor.
4. Save money.
Incorporating can provide freelancers with tax benefits. Like 95% of US businesses, when a sole proprietor incorporates and makes an S-Corp election, profits will “pass through” the company to you. You then declare that money on your personal income taxes. In addition, freelancers further reduce tax liability by monitoring legitimate business expenses and resulting deductions. Pro tip: The business itself can reduce or eliminate certain tax liability.
5. Increase the value of your company.
Sole proprietorships cease to exist if an owner dies or leaves. Being set up as a corporation means your company can continue to exist even if the ownership changes. Pro tip: Should you wish to sell, your company is more valuable if you have a nice legal business package to offer.
6. Be unique.
In most states, other people may not form a business or use a trade name that is the same as your corporate name. Pro tip: This benefits you legally and helps with marketing and building your brand.
While both the LLC and S Corp share benefits, there are a few differences. For example, an S Corp may have more tax advantages than an LLC, and it is preferred by outside investors. However, an LLC may easier and cheaper to get and maintain, and it provides a more flexible management structure. A tax or legal professional can help you decide what structure is best for your business.
Whatever you decide, make your choice soon and begin to enjoy your benefits as a business.