It’s very common for freelancers to wonder if they should incorporate or form an LLC. If you are a freelancer or consultant, you do not legally need to incorporate your business or form an LLC, as more than 70% of all businesses in the United States are actually sole proprietors and get by just fine. This does not mean there aren’t certain advantages to doing so, however.
While you may not believe you need liability protection, what would happen if a client holds you in breach of contract? Can you afford to put your personal assets at risk to satisfy claims against your business? When you operate as a sole proprietor, there will be no legal separation between your business and yourself and your personal belongings. Of course, not all freelancers are at risk of being sued. Lawn care companies are at a much higher risk than individuals who are freelance writers from home, for example.
Remember that you will not be shielded from all liability or lawsuits just because you incorporate or form an LLC. After all, you will still be responsible for any legal costs and you may be found liable. If you have concern about your risks, do you have professional liability insurance to protect you, whether or not you incorporate?
Is It Worth the Trouble?
Sometimes freelancers incorporate their business because they think they should, or to save tax confusion when hiring many sub-contractors, only to find it’s a hassle they weren’t prepared for. Along with the cost of up to $600 plus annual upkeep payments, you will face stricter requirements for maintaining your business, filing annual documents, and payroll taxes. You need to examine if incorporating will truly save you money to decide if it’s worth the cost and additional hassles.
What About Forming an LLC?
Don’t assume that your options are merely not incorporating and operating as a sole proprietor and incorporating your business. You can also choose to become a single-member LLC, or limited liability company. When you form an LLC, you are not actually incorporating, but you gain many of the benefits like liability protection with fewer requirements to meet and a lower cost. Many freelancers who can benefit from incorporating will still see greater benefit by forming an LLC.
… Then There’s the Issue of Credibility
Finally, there is another good reason to form an LLC or incorporate as a freelancer. It can add some legitimacy to your business, especially when you want to work with larger companies that hire freelancers. Using your own name tells your clients and potential clients that you are essentially a one man show, limiting the work you take on, while incorporating or creating an LLC gives the idea that you are a professional company that is not going anywhere and knows what to do.