Self-Employed? Five Reasons to Consider Incorporation
If you are one of the many who are self-employed and are experiencing business growth, you may want to consider incorporating your company. Incorporation means your business becomes a separate legal entity that operates under state and federal business laws. Considering the idea of incorporation means that you are ready to take your business to the next level. Changing your company from a sole proprietorship to a corporation or a Limited Liability Company (LLC) has several advantages.
From Sole Proprietor to Incorporation
There are five reasons why it would make sense for you to consider incorporating your business. For business owners, incorporation:
- Boosts your credibility. Consumers are more likely to want to do business with a company that has “Inc.” after its title rather than “sole proprietor.” Since anyone can be a “sole proprietor,” people who do not know you personally may not be willing to take a chance on your business. Establishing a corporation can be a shorthand way of letting clients know you are business savvy and not just playing around.
- Provides limited liability. Sole proprietors who incorporate their business have limited liability for their debts and obligations. This means that your liability is limited to the amount of money that you invested into your company. So, a creditor can only seek payment for a debt from your company’s assets and not from your personal assets.
- Offers tax advantages. When you incorporate your businesses, you can use your operating and and other expenses as tax deductions. You can also write off losses or certain employee expenses. Your profits may be subjected to double taxation if you operate as a C corporation, meaning both your personal income and business income are taxed. However, you may choose to operate as an S corporation and pass your income and losses through shareholders. Contact a professional tax preparer to discuss the operating procedures for different types of corporations. Also remember to discuss the tax implications not just for state and federal taxes, but also local business and payroll taxes, before deciding where to incorporate. Some cities, like New York, have city payroll taxes that are levied on top of state income and business taxes. And, San Francisco charges businesses operating within its boundaries a city payroll expense tax on annual payroll expenses exceeding $150,000.
It may be worth it to consult with a career or business coach to discuss the best way to establish your corporation in your particular location. A Google search can help you find one knowledgeable about specific issues related to your area. For example, the search term “career coach San Francisco” would help you locate someone knowledgeable about the tax issues there.
- Makes it easier to obtain capital. As your business expands, so does your need for financing. If your business is not incorporated, you may have to take out a personal loan for your operations. You are more than likely to find investors through selling shares of stock or get approved for a business loan when your business is incorporated.
- Continues your legacy. Should anything happen to you that prevents you from operating your business as a sole proprietor, your company will close. As a corporation, you can transfer ownership to someone else who can continue the work that you have started.
Although there are many advantages to incorporation – even if your company has only one employee – there are some specific requirements that apply to corporations that don’t apply to sole proprietors. These vary by state, but most require corporations to have a board of directors, maintain detailed corporate records and file annual statements with the secretary of state in the state where the business is incorporated. These requirements are not necessarily burdensome. You may only need to have one director on your board, and most businesses need to keep detailed records anyway. You should evaluate the requirements for incorporation in light of your individual business to decide whether the increased hassle factor outweighs the above benefits. Even if you have been freelancing for years, a qualified career coach can help you decide the structure that makes sense for you.