If you are a consultant or independent contractor, you may have wondered whether or not you should incorporate. There are many advantages to incorporating, but that doesn’t necessarily mean it is the right thing to do for everyone.
Here are some of the pros of incorporating:
1. Liability Protection.
The most important legal reason for incorporating is to protect your personal assets from potential liability. If there is a lawsuit related to the services you provide or your work, you will be able to protect your home, car, and other personal assets by incorporating and adhering to corporate formalities.
2. Tax Savings
As an incorporated entity, you will be able to enjoy many tax savings that are not available to sole proprietors. For example, with a S-Corp, you can classify payments as distributions instead of wages, which are taxed at a lower rate. In addition, there may be a number of tax credits and deductions which you can take as an incorporated entity.
3. Expanding Your Business
Incorporating can help set you up for growth in the future. If demand for your services increases, you can easily begin to hire employees and expand if your business is incorporated. You also have more options for raising capital as an incorporated entity. Sole proprietors generally have to take personal loans if they are in need of funding.
4. Increase Credibility
Simply by having an “INC.” or “LLC” after your name, you have increased your credibility. Incorporating will make it clear to clients that you take your work serious, and aren’t just consulting as a way to make some money in between gigs.
On the flip-side, incorporating does create more paperwork. Aside from the initial filings that are required, you will have to file annually with your state and make required payments with those filings. Costs are also an important point to think about. Start-up costs for sole proprietorships are almost nothing compared to incorporating. Further, incorporating may not be advantageous from a tax standpoint in all circumstances. A knowledgeable attorney can help access your specific situation and determine if incorporating is the best route for you.