Should I Incorporate as a Freelancer?

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Freelancing is becoming very popular in today’s business world. In fact, a 2018 study found that more than 56 million people—about 34 percent of the national workforce—are freelancing in the U.S.

There are numerous benefits to freelancing, including a better work/life balance and greater flexibility compared to working for a traditional employer.

But are there risks involved in working as a freelancer? And does incorporating as a freelancer protect individuals against these risks?

Legal Risks

When employees work for a traditional employer, the company protects against legal liabilities in the workplace. But freelancers are at risk when they are self-employed.

For example, negligence, defamation, confidentiality breaches, intellectual property infringement and data protection are the most common risks faced by freelancers. To manage these risks, some freelancers choose to incorporate.

Sole Proprietorship

One way to incorporate as a freelancer is a sole proprietorship, which is a one-person company. This means you are in the driver’s seat, controlling your salary and reporting all earnings and losses on your tax return.

While this scenario gives you a great deal of decision-making power, it also creates a risky situation because you personally assume all financial and legal obligations. You become responsible for all liabilities, and if sued, you have no protection.

Establishing a limited liability company (LLC) is another option.

Limited Liability Company (LLC)

After a sole proprietorship, an LLC is the next simplest structure to form. Creating an LLC means you are no longer considered the owner of your business, which means your personal assets are completely protected. When creating an LLC, be sure to separate all personal and business finances, and never combine them.

Some freelancers choose to incorporate in order to limit their personal liability. Others incorporate to gain the tax benefits that LLCs provide.

For example, in an LLC, you can choose to pay all of your taxes via your personal tax return or pay corporation taxes and use your personal tax return to claim the salary you receive from the LLC. This is quite beneficial for freelancers who want to keep their salary in a low tax bracket and pay a lower corporate tax.

In addition, some freelancers choose to form an LLC because they believe it makes them a more legitimate business. Unlike a sole proprietorship, and LLC is an official company with a formal business name and number. And this makes some

freelancers feel more professional, credible and respected within the business world.

If you are unsure about incorporating, consult a business start-up specialist at Inc Authority to determine what entity is best for you. Call us at 866-545-1867.