Top Reasons Why Consultants Should Incorporate
With today’s economy being the way it is, you may have decided to do some consulting work on the side. As you get more and more consulting work, you may wonder if you need to set up a corporation or limited liability company or something similar. This article will discuss what you should consider in deciding whether you incorporate. It’s always a good idea to consult a professional to get advice on this matter, as every business is different. A starting point to evaluate whether you should even consider incorporating if you spend more than five to ten hours a week doing consulting work, or are in a partnership arrangement.
As a consultant, you aren’t legally required to incorporate, but it does have its advantages. Incorporating may have tax advantages; it can also help you protect your personal assets. Stated simply, the answer on whether or not you should have incorporated depends on your income—and your comfort level with the issue personal liability that you are exposed to. Below are some reasons why some consultants choose to incorporate:
1. Liability Protection
Generally, consultants choose to incorporate t to limit their personal liability. Incorporating, even if you're the only employee, creates a legal wall between your personal assets and your business assets. In the event of legal proceeding against your company – assets such as your home, cars, bank accounts and other personal assets will usually be deemed off-limits. Additionally, if your business involves liability, it’s very important to incorporate or form an LLC, because as your business contracts become more valuable, it is more likely that a client will sue if they are not satisfied.
2. Tax Advantages
When it comes to taxes, many consultants have trouble deciding whether they should incorporate or form an LLC or continue being self-employed. In the earlier stages of developing your business, startup costs may exceed your revenue and put you in the red. If you elect to create a subchapter S corporation, a tax status that is intended for small companies, or a limited liability company (LLC), you'll pass the tax liability or loss through to yourself and your shareholders (if there are any). Usually, incorporating can provide consultants with other tax benefits, such as the ability to deduct business expenses, and others. Those early losses may protect some of your income when your business starts making money, which is when the tax advantages will be most beneficial to you.
Many consultants work with other businesses, and having the abbreviations "LLC" or "Inc." attached to your name implies you are a serious business professional. Should you ever decide to get a loan for your business, this may be to your advantage, because a number of lenders are more apt to lend money to a company rather than a sole proprietorship. Incorporating can also assist you with building your brand and drawing new clients, especially if you want to go after bigger fish clients like corporations.
Incorporating or forming a limited liability company is not a difficult process; you can have a corporate services company assist you or you can do the paperwork yourself to register your new business entity with your state. If you are considering incorporating your business, you should probably set up a meeting with a certified public accountant (CPA. Although it is relatively easy and inexpensive to incorporate a business, it is also recommended that you consult a corporate attorney to discuss the issues that may require legal advice and action in your specific business situation. Your choice of the entity will have a major impact on your taxes, expenses, and ongoing requirements so you want to get the best advice possible or your business.