Consultants – 5 Compelling Reasons to Incorporate

March 25, 2009 by  
Filed under ebusiness incorporation

At some point during your career as a consultant in whatever field of work you happen to be in is whether or not to choose incorporation to create a separate business entity from that of yourself. In effect what you’re doing is creating a company that pays you for the work you do. Anyone you work for in the role of consultant pays the company – with it’s own separate tax ID number – and this company, your company, pays you. Starting your own company by incorporating has some great advantages for consultants.

Five Reasons to Incorporate as a Consultant:

1. End of the Year Tax Savings
Depending what your business is you can possibly save huge amounts of money. A visit to your accountant is in order.

What I’ve done in the past is set up an S Corporation. The company I consult for pays that S Corp. That S-Corp has a business checking that I use to pay me if I need a salary. I pay myself whatever minimum I need. I write checks for business equipment and all business fees from that corporate checking account. At the end of the year I can deduct a lot of it on the corporate taxes.

For the income I paid myself I am taxed at the regular rate – depending on level of income. As you can see – you can save quite a bit on taxes if you only pay yourself the bare minimum you need to live, for your rent, food,and all other bills.

C-Corporations, pay taxes at the 35% rate. Choose carefully.

2. Limited Personal Responsibility
In my mind, the most important reason for incorporating a business is to limit my own personal responsibility (liability). Creating a corporate entity – a corporation – is just like creating a buffer between yourself and your personal assets like house, savings, and other assets.

Keep in mind – you can STILL have your assets taken by a court if they rule that you acted negligently, maliciously, and a few other things. You own the company after all.

3. Less Chance of Tax Audit
If you don’t incorporate and you’re required to file a Schedule C you are at risk for having a a tax audit. The IRS audits those in this category at a higher rate than those who’ve incorporated.

4. Credibility Jumps
When your business name adds “Inc.”, “Co.” or “LLC” your credibility jumps in the eyes of the person you’re dealing with. It tells them that business is your focus – it’s a serious business, it’s your business, your career, you’re responsible for what the business does and doesn’t do.

There’s a higher likelihood you’ll get venture capital (VC) funding and traditional bank funding if you’re incorporated. Though some see the LLC designator as being less serious than Inc. or Co., that is changing and many companies are opting for the LLC corporations recently.

5. Health Insurance is Cheaper
A huge expense is health insurance. When you incorporate your company probably becomes eligible to purchase health insurance at reduced rates. In face, you may be able to obtain a medical reimbursement plan for those expenses not traditionally covered by insurance.

In summary, incorporating your new business can be the smartest move you ever made. Nobody wants to pay more money in taxes – and everyone has the option of incorporation available to them. The savings at the end of the year in taxes alone is WELL WORTH the small effort to incorporate. Have an accountant handle your taxes at the end of the year – for me it was only $300 to have the accountant do my taxes for me. Guess what? I saved over $4,000 as a result.

Let the professionals do what they do – especially accountants. They put money in the bank. YOUR bank.