Today's guest post comes from June Walker, tax and financial consultant to independent professionals since 1979 and, luckily for us, one of our speakers for the upcoming Creative Freelancer Conference this August in San Diego.
Every business conducts its affairs as a particular kind of business entity (or business structure). The organizational form that you choose determines which tax and legal regulations will apply.
For tax purposes the IRS gives a choice of the following kinds of business structures:
· Sole proprietorship
· Partnership (several types)
· Corporation (two types)
If you’re a self-employed in business and you have done nothing about a business entity, your business is already structured. It is a sole proprietorship.
There is no need to complicate where simplicity will suffice. For all but a few newly-hatched solo ventures a sole proprietorship is the way to go.
Wait. Wait. Wait.
If cousin Harry at the schvitz or Aunt Tillie during Thanksgiving dinner told you that you’re a big boy now and you’d better incorporate, hold on a minute. Don’t rush into anything. Get some information.
When you look at how to structure your indie business, trying to decide which entity is best for you, be sure to ask yourself the right question. (I know I’m always advising on how to ask a smart question. Well, you must, if you want a smart answer, that is.)
So, ignoring Harry and Tillie for the moment, are you looking to change your business entity for tax reasons or for liability purposes?
If it’s for tax reasons, as a sole proprietor are you taking full advantage of every tax law and reg available to you? Don’t go into the expense and hassle of incorporation if you can’t answer a firm yes to that question.
The Feds say that nearly four out of five businesses in the United States are sole proprietorships. Yet just about every lawyer advises a budding indie to incorporate. In twenty-five years of experience I have found only one attorney who didn't answer “yes” when asked “should I incorporate?” And every new client that has come to me already set up as a corporation said he or she did it because “my attorney (or my accountant) told me to do it.” None of them had a clear idea of why incorporation was supposed to be an advantage.
The tax benefits of incorporation are pushed heavily by attorneys because that’s what they’re used to: working with corporations, not working with solos who design websites or computer programs. They don’t know the tax benefits available to indies!
Sometimes there are good reasons why a self-employed should incorporate, but, if advised that you must do it, find out why. Be sure the professional explains to your satisfaction – and also to the satisfaction of a savvy friend, colleague or relative — what makes incorporation necessary.
Facts — to stifle some old husbands’ tales:
All business structures
· allow you to deduct business expenses
· allow some sort of deduction for medical insurance
· allow for contributions to pension plans
· allow you to hire employees or subcontractors
· allow the other guy to sue you
· do not allow you to hide income
· do not allow you to write off personal non-business expenses
To read more continue here…