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As freelancing continues to witness an unprecedented explosion, it is now far past being a mere side hustle. Millions of freelancers across various industries and niches are now increasingly considering a professional presence, limited liability, and the substantial tax benefits that come with incorporating their business as a limited liability corporation.
While operating as an independent sole proprietor is seemingly hassle-free, with little-to-no compliance requirements or formalities, the benefits of incorporating your freelance business are undeniable. In this article, we dive deep into the host of benefits offered by an LLC, and how freelancers can make the most of such provisions to take their business to the next level.
Limited Liability Protection
Freelancers operating as sole proprietors expose themselves to substantial risks, with any debts and lawsuits capable of impacting even their personal finances and assets.
With an LLC or LLP, however, the overall liabilities are limited to the assets of the business, leaving the personal finances of the owner such as a house, savings, or investments untangled with that of the business.
Incorporating a business essentially creates a separate legal entity which can borrow, raise funds, sue, and be sued under its own name. This allows freelancers to leverage and expand their business without having to worry about unforeseen circumstances wiping out everything they own.
An LLC or LLP has significant tax advantages compared to sole proprietorships, depending on the structure, and state of incorporation. While having a separate legal entity will not automatically lower the tax bill, it can, however, help high income freelancers save on the dreaded self-employment tax.
This holds especially true for an LLC that is taxed as an S Corp, under which freelancers are only taxed on the salary portion of their incomes, while the remaining profits are not subjected to a distribution tax of 15%. The IRS, however, requires corporations to pay a reasonable salary, and have some income left over, so it is not possible to save substantially on taxes by paying yourself just $1,000 a year.
Additionally, incorporating your business may allow you to claim deductions for business expenses that you can’t claim as a sole proprietor, such as the cost of a home office.
Professionalism & Credibility
Incorporating your freelance services as a business removes the amateur and hobbyist tag that most freelancers still have to contend with. Customers will now deal with a recognized legal entity, capable of entering into contracts under its own name.
Freelancers have long missed out on higher value clients and orders owing to not having a recognized legal entity such as an LLP or LLC. As such, incorporating stands to unlock a lot of doors even if they continue to operate solo, or as a one-person business.
Access To Business Financing
Incorporating a business opens up further avenues pertaining to borrowing and raising funds, whether it is risk capital from investors, or term loans, and lines of credit from banks and financial institutions, there are plenty of options available for corporations that are restricted for sole proprietors.
Any funds borrowed as an individual freelancer or a sole proprietorship exposes the freelancer to the fullest extent of the liability. This means, in case the business fails, the borrower’s personal assets will be in jeopardy.
Incorporating further allows the business to issue shares to investors, or as collateral for lenders, making the overall process much more conducive when compared to borrowing as a sole proprietor. Given that corporations are required to be audited each year, their finances carry a lot more weight when working with investors or bankers.
In conclusion, incorporating your freelance business holds a host of benefits, and remains crucial for taking your business to the next level. Given how straightforward and affordable the entire process is, with a quick search on ‘How To Set Up An LLC In California’ yielding 100s of results, services, deals, and options, there really is no reason to wait it out.
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