Freelancers—Should You Incorporate? 3 Reasons Why
A big question for many freelance writers, designers, and developers is whether they should incorporate their business.
To be clear, you can work freelance forever and not incorporate. No law says you have to, and many freelancers are perfectly happy without incorporating.
However, there are three excellent reasons for creative freelancers to consider incorporating.
Three Main Reasons for Freelancers to Incorporate
Here are the three main reasons to incorporate your business:
Reduce taxes by paying yourself dividends
Limit your liability
Look more professional
Let’s review them one at a time.
Reduce Taxes by Paying Yourself Dividends
When you incorporate your business, you become an employee of your company. “You” and the company are two separate entities.
As an employee, you get a salary from the company.
But, you are more than just an employee, you’re also a shareholder in the company. If it’s just your company, you are the only shareholder.
Like any other incorporated company, your company can decide to pay shareholders a dividend. If there’s extra money in the company account, the company may decide to spread the wealth by declaring a dividend.
In most Western countries with similar accounting systems and tax structures, dividend income is taxed at a lower rate than salary income. Sometimes, much lower.
An Example of Dividend Savings from the U.K.
From this Gov. U.K. page, I found a clear example of tax savings on dividends.
This example assumes your company is paying you a total income of £32,570. See how it’s divided between salary and dividends.
Here it is:
You get £3,000 in dividends and earn £29,570 in wages during the tax year.
This gives you a total income of £32,570.
You have a Personal Allowance of £12,570. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
20% tax on £17,000 of wages
no tax on £2,000 of dividends, because of the dividend allowance
7.5% tax on £1,000 of dividends
Notice the dividend allowance and the much-reduced tax on other dividends, 7.5% vs. 20%.
With dividends, this person would be paying £3,475 on an income of £32,570.
Without dividends, it would be 20% of £20,000, which is £4,000. That gives a savings of £525. Do this for a few years, and the savings are considerable.
Talk to your Accountant First
I always recommend that freelancers and agency owners have an accountant to guide them with their finances and taxation.
Regarding dividends, the taxation laws can be complex, and they vary by country and sometimes by region, state, or province. But once you know what they are, they’re easy to follow.
One thing to know: although your company can pay you some of your income in dividends, you can’t get all your income that way. So, you need to understand your local tax laws to take the greatest advantage of dividends and stay within the regulations.
Limit Your Liability
Reason two to incorporate is to limit your liability. What does this mean?
It means that should someone sue your business, they can only go after business assets. Ideally, you keep few assets in your business. The rest is personal, which is separate from your company.
Being incorporated means, they can’t take everything you personally own—your house, car, savings, or your awesome vinyl collection.
Now, many people reading this will say, “I’ve never been sued, and it won’t happen.” I can only hope you’re right, but lawsuits big and small happen every day, especially in the lawsuit-happy USA.
What if you make a critical mistake on a website or write an article that causes someone to sue your client, who in turn says it was your fault and therefore sues you?
Better to be safe than sorry and separate your company assets from your personal possessions.
Being Incorporated Makes You Look Bigger, More Professional
In the communications business, appearances are reality. Virtually every serious company is incorporated. It’s how business operates.
So, while you could simply be Bob Smith, Copywriter, you would seem more professional as Smith Writes Inc.
A corporation adds a layer that suggests there’s more behind the name. To potential clients, it feels more substantial.
Learn More About Incorporating a Company in USA, Great Britain, Canada
USA Corporate Services (not a government site, not an affiliate, just good information)
Are There Any Reasons Not to Incorporate?
Yes, there are, and they mainly have to do with money. Here they are:
It initially costs money to incorporate. You can do it yourself, hire a company that specializes in incorporations, or hire a lawyer. Governments also want fees.
You’ll have to keep a separate bank account for your corporation. Business bank accounts come with fees.
You, or your accountant, must file separate tax returns.
Get Your Book Here
Learn more about incorporating a company in my book, How to Start a Successful Creative Agency. It’s the essential business guide for graphic designers, copywriters, filmmakers, photographers, and programmers.
“I just picked up your book yesterday! Already loving it and can’t wait to sit back down with it.”
Dylan Silvestro, Freelance Art Director
Over 320 pages and 23 chapters, available at Amazon (Paper & Kindle), Kobo (ebook), Apple Books (ebook), and Gumroad (PDF).
The book is packed with useful information to help creatives start and grow their business.
Want a free taste first?
Sure! Sign up below to get a free PDF of Chapter 14, Working With Clients.
Questions? On Twitter, I’m @StroteBook. D.M.s are always open. Ask away.