What Do Freelancers Need to Know About Incorporating?

In 2018, a survey from Upwork in partnership with the Freelancers Union revealed the state of freelancing in the United States. Given the continual rise of freelance work, it wasn’t completely shocking to see that the future of freelance is increasingly on the up and up.

Last year, 56.7 million Americans were freelance workers, a 3.7 million increase since 2014. The survey’s infographic also noted that more Americans are choosing to freelance today, at 61 percent in 2018 versus 53 percent in 2014. New technology enables freelancing, and nowadays workers have better flexibility and work/life balance.

In fact, 87 percent of those surveyed stated that they were optimistic about the future of freelancing — a percentage that continues to rise.

As more workers turn to freelancing in a full-time capacity, many freelancers may wonder if they should incorporate. The question remains, is it worth it to incorporate as a freelancer? If so, which entity is the “best” structure to choose? And how do you even get started?

Let’s break down the answers to each of these questions, below.

Why should freelancers incorporate?

There is a certain preconceived notion that incorporating isn’t an easy process. It’s often viewed as something that is time consuming and requires filling out a lot of paperwork. There is a little bit of truth to this myth: incorporating is not without filling out some paperwork, but the good news is that it’s not too complicated to set up a business structure.

Generally, a freelancer’s goal is to do more instead of less. Freelancers want to expand their portfolios and keep existing clients. They also want the work they do to attract new clients. And, chances are, they want to get paid (and continue to be paid) for their services.

Should you choose to incorporate, you’ll be able to enjoy the following benefits:

  • Incorporating makes it a bit easier (and more affordable) to file self-employment taxes through structures like limited liability companies (LLCs) and corporations.
  • Certain entities, such as LLCs, provide liability protection to freelancers. Liability protection helps to separate professional assets from personal ones. This keeps the personal assets of the freelancer, like houses and cars, from being held personally liable and seized in the event of an unforeseen circumstance.
  • It helps to build credibility. As you progress further into your freelancing career, you’ll want future clients to see that you’re the real deal. Incorporating shows them that you, and your freelance business, are established professionals worth working with.

Which entity should freelancers incorporate as?

Freelancers often choose to incorporate as a sole proprietorship or form a limited liability company (LLC).

The freelancer has full control of the business when they incorporate as a sole proprietorship. That’s because now they are the business. Unfortunately, incorporating as a sole proprietor does not include liability protection. They are fully responsible for anything and everything that happens to the business, with their personal assets also at stake. Freelancers often incorporate as sole proprietors on a starter basis due to the entity’s affordable nature. They have the option to switch to another entity as needed.

Many freelancers also like to form LLCs. All of the benefits mentioned earlier (including tax breaks, liability protection, and the ability to build credibility) are included in an LLC formation. Freelancers that incorporate as an LLC may also elect S Corp status and file as an S Corporation with the IRS. This allows your freelance business to avoid double taxation and tells the IRS you would rather be taxed as a partnership.

How do I get started?

Once you’re ready to incorporate your freelance business, it’s a good idea to get accustomed with the rules of the state you want to file in. Regulations for entities vary from state to state. An LLC that was formed in New York, for instance, may be subject to following different rules than that of an LLC formed in Delaware.

From there, you may begin filing with the Secretary of State or utilize the help of a third-party incorporation service that can assist you with your documents for forming an LLC, sole proprietorship, or another entity.

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Final refresher: Why should I incorporate?

We cannot tell you which business formation is the “best” to incorporate your freelance business. The choice to incorporate as a sole proprietorship, LLC, or another entity entirely is contingent on the type of freelance work you do and your industry. Do a little research to determine which entity is the right fit for your needs and where you would like to incorporate.

What we do advise is that freelancers try not to put off the process entirely. Serious freelancers want to expand their business — and incorporating is a great step to take for that kind of forward growth.

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