Updated: Mar 26, 2021
With the passage of AB5 in California (the new law that imposes significant risk on employers who mischaracterize employees as independent contractors), and the potentiality for that same law to be applied across the United States, you may be considering incorporating to strengthen your position that you are not an employee. If so, we think that’s smart.
While the burden is on the employer to prove that a worker is not an employee, you can take action to help the people or companies who employ you to feel confident that they could successfully argue you are an independent contractor, and not an employee by incorporating your business and operating as a real business.
On top of that, incorporating can save you money, protect your assets, and limit your liability.
Up until now, you may have shied away from incorporation because of the upfront cost of hiring a lawyer or because you didn’t understand the benefits incorporating can bring to you. To help you decide whether incorporation is right for you, consider the following factors.
Incorporating as a business protects your personal assets, if you properly maintain your corporate form. This means keeping your personal and business finances separate, and having all agreements be between your corporate entity and your clients and vendors. It may sound complicated, but it’s actually quite simple when you know how to do it, and it can provide you with a level of peace of mind that supports you to want to expand your business to the next level of income and impact.
We’ve found that many of our clients who were stuck earning less money than they wanted, were able to get to their own next level of income success by incorporating and treating their business like a business.
Perhaps you have remained a sole proprietor so you don’t have to file a corporate tax return, but this is short-sighted and likely costing you a lot of money and opportunity for savings on your taxes. Think of it as stepping over dollars to pick up dimes, simply because the dollars were a little more difficult to pick up. Wouldn’t it be worth a little effort to pick up the dollar, if someone showed you how easy it could be?
Filing a separate tax return for your business is not that difficult, and could save you a lot of money on your taxes PLUS allow you to write off expenses that you may not be writing off right now, and reduce your risk of tax audit.
Filing as a sole proprietor or writing off business expenses on Schedule C of your personal tax return could increase your risk of audit by 7-9 times. And, on top of that, when you are a sole proprietor you need to pay payroll taxes on all of your income, whereas if you are incorporated and file your taxes as an S-Corporation, you only pay payroll taxes on the salary you pay yourself, which can be low (and reasonable), and you save yourself approximately 15% on the rest of your distributed income.
If you have been considering incorporating as a business, now could be the time. Contact us and let’s discuss the possibilities for you and look at what it will cost you to be considered an employee vs. making the investment to strengthen your position as a business owner.
Yes, you will pay some upfront costs to get set up as a real business, and you will have more ongoing costs to cover filing your taxes, but unless you want to be considered an employee, and taxed as such, which will cost you much more, we think that it’s worth it for you to learn to operate as a real business. And, we are here to help.
This article is a service of Hanson Legal. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.