By Freelance Writer, Will Newman in California
One of the questions students ask most often is: “Do I need to incorporate?” And the answer is: “It depends.” When I was faced with making the decision, I chose not to incorporate — but only after studying the advantages and disadvantages of doing so.
First, let’s look at the advantages.
For you, the most important reason to incorporate could be the tax advantages. As an incorporated business, you can offer your employees (you and your spouse, perhaps) tax-deductible benefits. Even if you’re the only shareholder and employee, you might qualify to deduct health insurance, life insurance, and travel and entertainment expenses from your taxes. And, as a corporation, you might qualify to provide yourself and your employees with a tax-sheltered retirement plan — a 401(k) — that individuals cannot get.
Since I’m a retired teacher and already have a good retirement plan, this wasn’t important to me. However, for many people (maybe you?) this benefit alone might be reason enough to incorporate.
A second reason to incorporate is the credibility you gain by having “Inc.” or “Corp.” at the end of your business name. This can send a powerful message to your clients and business associates about your professionalism and your commitment to the quality of the work that you do. Even if you work out of your back room or on your kitchen table, your business will seem much larger and more established. This is a benefit that I seriously considered.
The third major reason many businesses incorporate is to avoid personal liability claims. If you’re sued as a corporation, your personal assets cannot be touched. Only the money and assets you and your stockholders (if any) have put into the corporation can be used in a settlement. This can be a powerful reason for incorporating. However, for me, as a freelance writer, it’s a non-issue, because I feel that the very nature of what I do protects me. First off, there’s not much damage that I can do (particularly if I do my research well). All of my writing in this gig is “work for hire.” When it’s paid for, my client owns it. And I specify in my contracts that by paying for my copy, my clients approve its content and assume all liability for its use.
As for the disadvantages of incorporating, there are only two — but they’re major: the time it takes and the red tape you have to deal with. When you incorporate, you have a lot of paperwork that must be filled out and filed properly with your state and the IRS (along with a filing fee, of course). And while you do not absolutely need the advice of an attorney or accountant to do this, you might feel more comfortable hiring on — especially if this is your first time.
The bottom line for me was not to incorporate. But only you can make your own decision. Go to your local library or bookstore and pick up one of the very good “do-it-yourself” resources on incorporating, particularly those by Nolo Press. Thoroughly research the subject. Talk to friends in business who’ve incorporated and those who haven’t. Talk to your accountant if you have one. Then YOU make the decision that works best for your business.
[Editor’s Note: Learn more about opportunities to profit from your travels (and even from your own home) in our free online newsletter The Right Way to Travel.]