As with most independent contractors in California, you are probably operating and filing taxes as a sole proprietorship. Business is doing well and growing, and you’ve started to wonder ‘Should I, as an independent contractor, incorporate my business?” or “Would it even be worthwhile to try to incorporate my business?”

From choosing to set your business up as a sole proprietorship, you’ve now put yourself in a pickle: the result of which is that their personal life and work activities intertwined, and essentially become one and the same thing. While a sole proprietorship may seem like the simple and easy approach, it does expose you as an independent contractor’s personal assets to liability if debts or legal judgments are claimed against you.

 

Changing a sole proprietorship to an S Corporation (S Corp) or a Limited Liability Company (LLC) can offer a range of advantages, especially for independent contractors, because it allows them to take advantage of benefits originally designed for larger companies. These benefits include, but are not limited to:

  • Liability Protection
  • Increased Credibility
  • Business Name Protection
  • Income Tax Reduction
  • Increased Wealth Accumulation and Protection

 

Liability Protection: Why an Independent Contractor Should Incorporate in California for Protection

Both S Corps and LLCs separate personal and work-related liabilities by establishing a legal barrier between the two. In a properly structured and managed S Corp or LLC, independent contractors should have limited liability for business debts and obligations, while shielding their work activity from any misfortunate in their personal life. This is because the corporation has its own separate existence wholly apart from those who run it.  S Corps and LLCs have more corporate formalities that must be observed to obtain liability protection, however. Make sure that you consult your state’s laws for the precise rules, or consult an expert incorporation attorney for further guidance.

 

Increased Credibility: Appearing as a Legitimate, Real Business

Adding “Inc.”, “Corp” or “LLC” after your name can add instant legitimacy and authority to an independent contractor’s work. Consumers, vendors, and partners frequently prefer to do business with an incorporated company. Therefore, incorporating one’s business can provide a potential boost to business growth that is much more difficult to achieve without it. Many could argue incorporating as an independent contractor is a form of investing in your business.

 

Protect Your Business Name

Imagine building your empire under “Rick’s Contracting Services”, and suddenly your customers are calling in confused they haven’t spoken to you or your company. You find out that a competitor has legally registered under a similar name, yet you haven’t incorporated your business.

In most states, other independent contractors and businesses may not form an entity or use a trade name that is the same as your corporate name. This benefits the business legally, helps to preserve the independent contractor’s uniqueness, and helps in brand-building and marketing.

Potential Savings on Taxes: Income Tax Reduction

Asking “Should I incorporate my independent contractor business” is similar to asking “Should I set up a structure that’ll save me taxes in the long run”? If it makes sense for you to be taxed at a corporate rate, then incorporation could also end up saving you money in the long term on taxes.

Unlike a sole proprietorship, an S Corp and an LLC can elect to be taxed as a corporation. When an independent contractor establishes one of these entities, he or she can avoid double taxation of corporate profits.

Additionally, S Corps and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.  Make sure you consult a competent tax professional experienced in working with S Corps and LLCs for guidance.

 

Increased Wealth Accumulation and Protection

In addition to reducing double taxation and utilizing better expensing of business costs, independent contractors often benefit from greater retirement plan options and contribution amounts when they form an S Corp or LLC, as compared to being a sole proprietor. These factors ultimately create more take-home pay and savings for the independent contractor, which increases the rate of their personal wealth creation.

Finally, both an S Corp and an LLC allow an independent contractor to shield their personal assets from liability. A financial advisor specializing in retirement plans for S Corps, LLCs, and sole proprietors can be an invaluable resource in getting the most out of these opportunities.

 

So, Which Entity Is Right for You? Should You Incorporate as an Independent Contractor in California?

Selecting the right business entity helps your chances of financial and operational success as an independent contractor and can take several forms. We always recommend working in tandem with a financial manager and lawyer to choose the right business entity and then create that business without legal holes. To get the most out of your independent contractor status, give us a call. As well, we recommend you contact a trusted financial manager in California.

 

**Please note: The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Author: Jack Brkich III, CFP