Some advantages to a corporation or an LLC
Incorporating your company or forming a limited liability company makes your business a separate entity. There are different types of corporate entities for small businesses, including an S Corporation (also called “S-Corp”), a C Corporation (also called a “C-Corp”), and Limited Liability Corporations (also called an “LLC”).
The type of entity you choose will have implications for your financial future and taxes. Here’s a quick overview of the tax pros and cons of each:
This is a popular business structure for small businesses. Using this structure could help alleviate the steep income and self-employment taxes that sole proprietors pay. An S-Corp is a common structure among small businesses because individual owners pay taxes on their company’s earnings without paying separate business taxes on the entity’s net income. Many consider and S-Corp a good option for businesses that plan to grow by taking on outside investors or going public.
As a guideline, if you make between $80,000 – $100,000 in bottom line profit then structuring your freelance business as an S-Corporation might be worth considering.
An LLC is perhaps the most popular structure for small businesses since it has fewer legal requirements and many of the same benefits as an S-Corp. LLCs don’t actually gain much in tax savings over and above a sole proprietor. This is because, like a sole proprietorship, the business owner is taxed on their entire net income.
The tax deduction benefits of being a C Corporation are significant, especially for employers who can claim a 100% deduction of employee health insurance costs as well as other deduction benefits such as group term life insurance, business-provided vehicles, certain education costs, and more. Corporate tax rates are also lower than the individual tax rates of sole proprietors or LLC owners.
Considering the advantages
Let’s take a look at some of the advantages to these structures:
1. Protect your assets
This is a big one. If you’re concerned about your exposure to a lawsuit or debts, running your business as an LLC or Corporation is a good idea. With an S-Corp or LLC, your personal assets are shielded from lawsuits and bankruptcies.
Structuring your business as an LLC or other corporate structure can lend credibility to your business because it sends the message that you’re serious about what you do. Some consumers and vendors prefer to do business with a corporation or LLC rather than an individual. Having an “Inc.” or “LLC” after your company name can lend an air of legitimacy to your small business.
That being said, incorporation isn’t the only way that a small business can establish credibility. Oftentimes, simply using a trade name or “doing business as” (DBA) name, instead of your own name can add credibility to your operations and marketing efforts. You’ll need to check the availability of the name you choose with your local government and then register your DBA name accordingly.
If you’re a sole proprietor and close your business or pass away, the company goes away too. If your business is a corporation or LLC, it can continue operating in your absence. If you plan to pass the business along to your children or a partner, an LLC or S-Corp may be the way to go.
4. Improve Your Chances of Securing a Business Loan
Another distinct, often-overlooked advantage of incorporating your small business is that lenders often require businesses to incorporate before they’ll lend them money. If you can’t get access to business financing at a crucial time, this may potentially limit your growth plans. Major banks often like to see that you maintain separate business and personal finances. Incorporating is a good way to do this.
Incorporating your small business is a big decision and may benefit your business substantially or it may have no impact at all. If you’re unsure, always consult a lawyer or tax professional. These folks can build a picture of your unique business needs and help you come to a decision that makes good fiscal and business sense.