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Self-Employed? When and Why to Incorporate Your Small Business

Money Girl explains the pros and cons of incorporating your small business, and when to consider it. 

By
Laura Adams, MBA,
Episode #372
Self Employed? When and Why to Incorporate Your Small Business

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.

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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.

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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.

In other words, your personal belongings—such as your bank savings, investments, real estate, and vehicles—are always at risk when you’re a sole proprietor.

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