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When should a freelancer incorporate?

On Behalf of | Sep 22, 2023 | Freelancing

As a freelance worker, you have no boss. This gives you both the freedom to decide what you work on and when and the responsibility of running your business to the best of your ability. Among the many decisions you must make for yourself is whether you should incorporate.

Many New York freelancers assume they must incorporate or that making your solo enterprise an LLC is always the best option for saving on taxes and protecting yourself from litigation. But while incorporation carries advantages for many small businesses, it is not the right move for every business owner. This is especially true for single-person operations like most freelancers have.

Two of the most common reasons business owners incorporate as an LLC are 1) to separate their personal wealth from lawsuits against the business, and 2) to lower the business’ income taxes. These are both good reasons to incorporate, but becoming an LLC might not give you these benefits as a freelancer.

Legal liability

The first thing you should ask yourself is if you have a reasonable fear of liability. Is there a legitimate chance that your freelance work will get you sued at some point? If so, your business probably should carry liability insurance to help pay legal fees and a settlement or jury award. Keep in mind that making your business an LLC does not mean it cannot be sued. And as a sole proprietor, the fact that the business would have to pay damages instead of you personally might be more of a technical than practical difference.

Tax advantages

As a sole proprietorship, you file your income taxes using Schedule C, Form 1040. Incorporating as a single-member LLC keeps you on Schedule C. It also adds a large layer of bookkeeping, reporting and filing requirements if you are based in New York State. For example, as an LLC, you must file corporation forms to the federal, state and possibly city governments. You must also pay yourself on a W-2 and pay for payroll costs as your own “employee.” Generally, being a sole proprietorship is much less hassle and paperwork. There are few (if any) non-tax financial advantages either.

Finally, you do not have to be a corporation to hire an employee.

On the other hand, incorporating does make sense for some solo freelancers. Ultimately, it depends on your individual circumstances, plans and goals. Consulting a business attorney can help you decide what form to make your freelance business.