Is Incorporating Necessary for Freelancers?

If you’re striking out on your own as a freelancer, you may be wondering if it is necessary for you to incorporate or form a LLC for your freelancer activities?

One of the main benefits of incorporation or LLC formation is the limited liability shield for the owner’s personal assets. However, limited liability does not extend to torts committed by you, so if you are negligent in performing your work, or if you get into a car accident while driving to a work-related matter, you are still personally liable even with a corporation or LLC. But limited liability can protect from other business liabilities, such as leases, loans, other debts, employment matters, etc. (assuming that such liabilities are not based on a theory of negligence). Of course, that protection is lost again if you personally guarantee liabilities like loans or leases.

Incorporating can also provide some tax benefits. It is possible for a freelancer to incorporate and then elect to be taxed as a S-corporation. That way, the freelancer can pay himself or herself both in salary and distributions — while salary may be subject to self-employment tax, distributions are not. However, you must take care not to pay yourself too much with distributions as opposed to salary, as the IRS looks out for business owners who pay themselves primarily with distributions in order to avoid paying self-employment taxes.

Finally, incorporating or forming a LLC can also make it slightly more likely to get hired. Companies are becoming increasingly wary of hiring independent contractors, as the IRS and federal and state departments of labor are beginning to crack down on misclassifications of employees as independent contractors. However, the fact that a freelancer has his or her own corporate entity that he or she performs their work through for multiple employers weighs in favor of an independent contractor classification.

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