To Incorporate or Not Incorporate?
That is the question.
You’ve been rocking out with your side hustle and are really beginning to see some traction. Does this mean it’s time to incorporate? Here are some things to consider when deciding whether you should take that big step or hold off for now:
Some benefits of incorporating -
Protect yourself and your assets. As a sole proprietor, there is no legal separation between your assets and your business’s. That means if you are sued, creditors can come after your personal belongings and you don’t want that.
Incorporation makes it easier to secure financing both from banks and investors. If you are thinking about growing, expanding - you may need some outside funding. Make sure your paperwork is squared away. Some lenders also shy away from offering funding to Sole Proprietors (you in freelance form). This is particularly important in the age of COVID-19 where there is a lot more business funding available.
Tax Advantages! Who doesn't want to pay less in taxes? Large corporations do it all the time. Incorporating can possibly help lower your tax liability and you’ll have access to certain write off’s that you otherwise may not have as a freelancer. Many expenses which are deemed ordinary and necessary for your business can be written off like your cell phone bill or even car insurance. Make sure to consult with you tax professional to see what additional write offs may apply to your specific industry.
You get to present a professional image and look more “official”. This will give you an edge when competing with other freelancers who do not have the “Inc.” or “LLC” at the end of their names. This also goes a long way with investors.
Consider incorporating if you intend to sign large contracts in the near future.
If you are thinking of signing a commercial lease, purchasing large equipment or opening a new credit card, you may want to incorporate and separate yourself from the business entity. A corporation or LLC can sign contracts, borrow and lend money, invest, and own property in its own name - removing you from the equation. The only way you can then be held liable is if you sign a personal guarantee. **Avoid contracts that require a personal guarantee if you want to remain completely anonymous.
Consider incorporating if you plan to hire employees or contractors.
When other people are involved, you absolutely want to make sure you have the right protections in place. Employers are often held liable for any job injuries and actions employees take against the business. You’ll want to protect yourself from any suits that make come your way!
Yes, this is a lot of legalese but overall it is a great idea to incorporate and form an LLC. There are many other entity forms, but for most people, LLCs are the most practical and inexpensive to obtain.
Is there ever a time when incorporating doesn't make sense?
Incorporation does come with some fees and well as the overall legal hurdle to overcome. Many states charge incorporation fees which range from $100-$500 and may require some yearly maintenance fees. If your side hustle income is generally lower than the cost to incorporate then maybe it's okay to skip for now. Incorporating also requires a bit of legal navigation between understanding your state’s incorporation requirements and obtaining and EIN number.
If you are having trouble understanding your state’s requirements or want to have us guide you through the process, be sure to schedule a consultation!