Money Girl explains the pros and cons of incorporating your small business, and when to consider it.
A Money Girl reader and podcast listener named Gail asks, “When and why should a self-employed person go through the trouble of incorporating their small business?”
This is an important question that many small business owners, freelancers, and contractors struggle with. But don’t worry--in this episode, I’ll clear up the confusion, and let you know when you should incorporate your small business.
What Is Incorporating?
Although “incorporating” a business sounds very complicated, it’s simply an umbrella term that describes the process of declaring that your business is a legal entity that’s separate from you as an individual. You have several options, such as becoming a C corporation, an S corporation, or a limited liability company (LLC.)
While incorporating your venture is generally not a legal requirement, it can give you strong protections that every small business owner, freelancer, and part-time side worker should consider. I’ll cover 5 major advantages of incorporating in just a moment.
What Is a Sole Proprietorship?
The structure you choose for your business or side hustle can be changed as it grows and matures. For instance, most small businesses start out as a sole proprietorship, and may become a corporation or an LLC as they hire employees or accumulate more business assets.
If you make money as a one-person business—such as a writer, photographer, designer, commissioned salesperson, or craftsman—and are not on an employer’s payroll or incorporated, you are a sole proprietor by default. So it can be easy to forget that staying a sole proprietor may not always be in your best interest.
What Are the Advantages of Incorporating?
Here are 5 major advantages of incorporating your small business or part-time venture:
Advantage #1: Protects your personal liability
Being a corporation or an LLC limits your personal liability when trouble rears its ugly head in your business. As I previously mentioned, an incorporated company is a completely separate entity from you and your personal assets. So even if you go out of business, you aren’t likely to lose your personal property.
On the other hand, remaining a sole proprietor means that you can be held personally liable for business-related activity or debt. For instance, let’s say you lose a lawsuit for breach of contract, or don’t make enough profit to pay a business loan. The injured party or creditor can go after your business and personal assets for compensation.