What do I need to know about incorporating?

January 19, 2016 12:23 PM

I have a part-time freelance thing that I do, in California. At what point do I need to get more formal about incorporating and such?

I'd like to go into my accountant this year and talk to him about this, but I literally know nothing, so please help me get the thought process going and understand what questions to ask, what to look for, etc.

I am a freelance book editor. I have done this very intermittently for many years, but three years ago got more formal about it. I now have numerous clients and my income has steadily risen each year. I do declare the income (only about 50% of my clients give me 1099-MISC, though). I do deduct expenses. All of this is handled on the joint tax return I file with my husband.

Up until now it's just been me, hanging up my virtual shingle, calling myself "Acme Editorial Services" but having clients make their checks payable to Ms. BlahLala. I am the only employee and intend to remain that way.

So what do I need to know about becoming more formal with this job? Being an entity? Making it a corporation? I literally don't even know what questions to ask at this point, so lay it on me, please.

posted by BlahLaLa to Work & Money (14 answers total)

I do some freelancing, and I have an LLC. The main reason why I formed an LLC is so that I could take advantage of the liability protection that comes with doing business as an LLC, so that if a legal issue arises, my personal assets aren't at risk.

There are maybe (maybe?) some tax advantages / disadvantages to consider. Some businesses won't hire you if you aren't some sort of legal entity (either an LLC or an S Corporation), because it makes their own tax situation more complicated or uncertain, so you may be unknowingly closing some doors for yourself by not having an LLC.

For me, the liability protection plus the cost (under $100 for me) made it a no-brainer.
posted by rachelpapers at 12:36 PM on January 19, 2016

One other thing: if you form an LLC, make sure that new written agreements that you make are an agreement between your clients and the LLC, not an agreement between your clients and you. That way the liability protection is in place. But IANAL, IANYL, etc.
posted by rachelpapers at 12:38 PM on January 19, 2016

I'm not a lawyer or an accountant, and this is not official legal or financial advice, but I have done freelance book editing, and I don't know that you need to incorporate. That may add more filing expenses and reporting requirements than you need right now. You should be able to handle everything about it in terms of taxes as 1099/Schedule C income without actually receiving 1099s from your clients (though if a given client's payments to you over the course of a year total more than $600, they should be issuing you a 1099).

If you want to use a DBA (doing business as) name, you can register that with the state of California, then you should be able to use it to open bank accounts (some banks, it looks like, may also require an EIN, employer ID number, which you can apply for online). Between those two things, you should be able to cover the "legal entity" angle without added costs or requirements. The only reason I would consider incorporating as an LLC for work like this would be if there were significant potential liability associated with the work I'd be editing, e.g., editing medical texts.
posted by limeonaire at 12:41 PM on January 19, 2016

Response by poster: Let me add the following:
-- I have no corporate clients, nor any clients requesting me to be an LLC or anything like. The nature of my work is such that I don't expect this to ever be an issue.
-- In terms of liability: I asked a question about this in the past, actually. I don't forsee any liability issues. I'm not editing medical texts, as limeonaire mentions. I do straight fiction, contracting directly with authors. The most liability I can predict would be someone saying "You did a bad job" and me saying "Here's your money back" type of thing.
posted by BlahLaLa at 12:53 PM on January 19, 2016

I formed an LLC 3 years ago after working for several years as a freelance bookkeeper. I haven't found any benefit at all to the new entity. If I had it to do over again, I wouldn't.
posted by layceepee at 12:54 PM on January 19, 2016

I'm not an expert at all, but I was incorporated for a while in CA, so I can tell you my experience.

If you're making enough money and can pay an accountant to take care of a lot of the paperwork, I'm sure it could be a great financial move, but for a DIY person like myself who is easily perplexed by tax code, it was confusing and frustrating. With an S-Corp you have to pay to be incorporated, set up corporate bank accounts and credit cards, pay estimated taxes each quarter ($200, I think?), keep your personal and business finances separate, pay yourself a salary (including social security and worker's comp into that fund), and then do four tax returns at the end of the year (a federal and state for the corp, the same for yourself.) Like I said, I tried to DIY, so I was constantly screwing up things that I'm sure are common sense for accountants, like that the deadline for corporate tax returns is one month sooner than the one for personal tax returns. So my suggestion is make sure you have a great accountant first! Good luck.
posted by bluecore at 12:54 PM on January 19, 2016

I used Nolo books and online resources to be a sole proprietor in California a few years ago.
posted by wintersweet at 12:58 PM on January 19, 2016

Oh hey I wrote a book all about this.

A formal business entity will help you project a bit more of a "professional" appearance, but so will a DBA ("doing business as," a type of fictitious name). If that's all you care about, then maintaining the business as a sole proprietorship is probably the most straightforward and cheapest answer.

Depending on your income level it may be beneficial to incorporate or form an LLC and elect corporate taxation, but the way that interacts with your family's other income is best determined by a CPA. Keep in mind that the more layers of formality you add on, the more you're going to pay in fees to the government and to accountants and lawyers. For example, LLCs in California are subject to a minimum $800/year tax, going up as you hit higher gross revenue thresholds.

A simple sole prop like you already have, possibly with a DBA and definitely with a separate small business checking account is probably all you need, but again you should talk with a CPA.
posted by zrail at 1:10 PM on January 19, 2016 [1 favorite]

So in general creating a CA LLC will not provide any real tax benefits - it will cost you $800 bucks a year however. As an LLC all profits pass through as income so it's not like you get some special "I'm a business" tax savings its virtually identical to what you are now. There's some way to get some tax advantages if you file taxes as an S-Corp (an LLC can file as an S-corp) but they're generally minor and can change on a case by case basis.

The main benefit of an LLC is as a form of insurance. It protects your personal assets in the case of a lawsuit. So you really need to decide whether that piece of mind is worth the $800 bucks a year (you can incorporate in another state and bring down that fee).

Honestly it doesn't seem worth the hassle for you and you may get some better protection from some sort of liability insurance.
posted by bitdamaged at 1:41 PM on January 19, 2016 [3 favorites]

In California, I strongly recommend Sole Proprietor. We way way overcomplicated things with an S-Corp and it was a pain to dismantle.
posted by Lyn Never at 3:45 PM on January 19, 2016

If what you want is to protect yourself from a ruinous lawsuit, look into errors and omissions insurance. It's cheaper and less trouble than incorporating - especially for someone like a freelance writer, who isn't in a position to make dangerous errors (unlike, say, a doctor or pilot).
posted by Rosie M. Banks at 4:34 PM on January 19, 2016

No need to incorporate. It just complicates your taxes. Unless you are bringing in much more than $100,000 a year, an S-corp will cost you more than you save. As long as your clients are okay with paying you as a 1099 contractor, you don't need a corporation.

So just keep doing what you are right now. If you want to operate under a business name instead of your own name, you can apply online at your county website. (This varies by state, in some cases you do it at the state level, at some the county level and others by city. Google "starting a business" in your state.) It typically takes a few minutes and a few bucks, one time. You should also register your business with your local jurisdiction and may be subject to local taxes.

A note about LLCs: many people hold the false belief that an LLC protects you from lawsuits. It does not. If you are worried about being sued you need business insurance or errors/omissions insurance. For your type of business that is probably unnecessary. Forming an LLC for the wrong reasons can be a costly mistake.
posted by JackFlash at 4:35 PM on January 19, 2016

I can't see the benefit to a corp for you. In California there isn't much/any tax advantage unless you're well into six figures and/or have lots of expenses/property. You're not looking to distribute/or sell portions of the company to anyone or share profit. There's some overhead to having a corp in addition to the expense. (Typically just an annual meeting, but you'll usually pay someone to file the annual paperwork. Avoid the Corporation In An Instant websites that claim to be painless. They're awful at explaining your responsibilities.)

As JackFlash says, liability insurance is probably a better choice than LLC. It will be cheaper and less work. (If you decide you want this kind of protection. You're probably correct that you don't.) If you're a member of any professional guilds, they should be able to point you to providers appropriate for your work.

Nthing the DBA. It's a cheap and easy way to spruce up your professional look. And if you don't have a separate bank account for your business, it's a help in setting that up too. (Though I regularly pay freelance editors and every one works under their own name.)

Talk to your accountant about it anyway so that you can interact with a real certified human who won't give you side eye for threadsitting. Ask lots of questions. They'll know this stuff and should be happy to answer.
posted by Ookseer at 8:15 PM on January 19, 2016

Response by poster: THanks, all. Like many of you suggested, my tax guy said it wasn't worth doing until/unless I'm making a much bigger income from it.
posted by BlahLaLa at 1:29 PM on February 19, 2016