I’m Doing Contract Work – Should I Incorporate?

March 1st, 2009 Posted by ted in Business, Uncategorized

There are many benefits and a few detriments to incorporating if you doing contract/freelance work. I’ve personally started at least 10 corporations of all types (C-Corp, S-Corp, LLP, LLC), so I possess a little bit of knowledge worth sharing.

The positives
First you are protected legally/financially by the corporate shroud once you are a corporation/propriety. Second, you can write off expenses through the corporation in ways that are well documented and easy to follow. Third, you can control your salary to yourself via dividends, which typically allows for better tax treatment. Fourth, many companies’ accounting departments will treat you a little more professionally (my subjective opinion) when invoicing/collecting.

The negatives
Incorporating costs money, although you can minimize this by using a small business accountant to handle everything. Second, your taxes will get more complicated, so you will likely be best served to use the same accountant for taxes. You are responsible for dealing with the IRS on a monthly basis to handle payroll liabilities (if you pay yourself or someone else a salary) – another thing that can be handled by an accountant. Last, you should set up a bank account for this corporation, and that can lead to some additional fees.

In Summary
I think it’s definitely a good idea in almost all cases, unless you’re handling a very light load of freelance projects. Since you’ll need to budget about $1k-$2k each year for the accountant, and a few hundred or more in business/banking and possibly legal fees, you’ll want to be sure you make at least 10x that amount I would think.

Let me know if you have questions about these types of questions – I love to help people start their own ventures when the time is right.