At some point a freelancer or a small business getting off the ground ends up considering whether to incorporate. Accountants can be quick to point out the tax benefits of incorporating… once a business or freelancer starts earning a certain amount of income.
But there are additional benefits that come with incorporating that could interest freelancers or small businesses well before they begin earning enough to excited their accountant. An accountant working full time for a company may not fully appreciate the benefits that come with incorporation at any stage of the journey.
Protection of existing assets
If a small business has more than one employee, the creation of a limited liability company (LLC) allows a degree of personal protection during legal proceedings. Law can be complex, but buried in the name of LLC is a hint at the fact that it used to limit liability. If one of your employees does something that gets them sued, or the company gets sued, the owner’s personal assets are not at risk.
That protection does not stop the owner from being sued for their own individual actions. An LLC is not a ‘get out of jail free’ card, but it will allow you to hire employees, or contract out work, without worrying as much that someone else’s actions can destroy everything.
Protect the employees of the business, or even the sole proprietor
If you have more than one employee, incorporating means you are more likely to gain access to things like disability insurance, unemployment insurance and more. Even a sole proprietor paying into these insurances can give that sole proprietor a safety net. Unemployment insurance isn’t available to an unincorporated single person business, but if paying into it as an S-Corp, it becomes a possibility.
The state will, of course, look far more closely at a sole proprietor looking to go on unemployment. They’re screening for someone trying to scam or freeload, and the scrutiny will be accordingly increased. But in dire situations, which one person businesses and freelancers sometimes face, it provides a much needed safety net. Many forms of insurance unavailable to an unincorporated sole proprietor can be attained once a business has incorporated. It’s important to check with local attorneys and accountants as state laws vary across the country regarding business law.
Business discounts, services and perks
There are a wide variety of services that benefit business more than an individual. Credit Cards offer expense tracking services, or attractive cash back options. Creditors often extend more credit to someone trying to get a business credit card, and once a business begins to get credit of its own the ups and downs of the business can be firewalled from an individual’s credit score.
There are a wide variety of discounts and special services available to businesses. Computer makers like Apple offer businesses discounts for their loyalty. You can save on things like shipping, gas, hotels and more. In some communities internet and phone services are more robust for businesses.
Unexpected social benefits
There are unexpected social benefits that surround being incorporated that are unexpected. Being able to call a business as a representative of another corporation can result in better customer service. Business cards with the name of a company on them rather than just a personal name can open doors. Respect is an invisible currency that is hard to pin down, but it does exist.
You might be able to save more on your taxes and more for retirement
This is the biggest reason most people think incorporation is advantageous. They’re not wrong. As a business there are more deductions that can be taken than someone can as sole proprietor. For example, interest on loans, finance charges and credit card charges can be deducted. For business owners with more than one employee, the business can choose to cover all medical expenses of an employee and then deduct them as expenses. Repairs to places of business can be deducted as well.
As an LLC incorporated as an S-Corp, there are opportunities to deduct the cost of taxes paid to employees, as well as to deduct employee retirement matches, even if there is only a sole proprietor. An SEP-IRA can often be extremely tax effective for incorporated entities. The best way to find out how to structure all this is to consult with a tax professional, who can explain the many different options and look at someone’s existing finances to provide advice.
It’s hard to predict when a business might take off
Many accountants warn off clients from incorporation because it might cost the client some money in their current situation. But business can change rapidly. A new client might double a small business’s revenue, or a large one time project goose income. Getting incorporated now prevents last minute scrambling, or finding out that one should have incorporated… but too late. Future proofing one’s business for unexpected success sounds odd, but is something all small business owners should consider.
The downsides of incorporation include paperwork and the necessity of following legal guidelines. The cost of a lawyer during incorporation can range widely, depending on the region of the country, and accountants will want to charge for the paperwork necessary behind keeping payroll for the business. Getting quotes ahead of time is important before making any big decisions about incorporating.
Yet many potential small business owners, freelancers and sole proprietors would do well to think about the non-monetary benefits of incorporating right away. They might also find, once consulting with a professional, that the savings due to deductions and changes might also be beneficial as well.
Sources:
Unemployment For Busted Entrepreneurs – Forbes
S-Corporation – Wikipedia
Does an S Corporation Have Lower Liability than an LLC? – BizTaxLaw
The Many Benefits of Forming an LLC – Entrepreneur.com
“Small Business Discounts” – Google