For extra income or as a sole source of income, more and more Americans are working in a freelance capacity, also known as contract work or 1099 work. We call it the “gig” economy, and it’s booming.
Maybe you took on some extra contract work to ease the family budget and discovered your skillset is in high demand. Maybe you have a passion project that’s starting to generate significant income. Or perhaps you’re a retiree doing some consulting work and wondering how it might affect your retirement plan.
No matter how casually your freelance work may have started off, if it’s taking root, it may be time to talk with a business planning attorney about forming a business entity.
If you don’t organize into a business entity like a corporation or a limited liability company (LLC), a sole proprietorship is the default classification. Maybe you started out casually taking on work in an independent contractor capacity and receiving the income as yourself made sense. A sole proprietorship is an easy way to start a business, but it may not make the most sense over time.
Forming a business entity such as a corporation or an LLC may provide strategic benefits:
Asset Protection
The over-arching benefit that a business formation provides has to do with liability protection. The personal assets of a sole proprietor may be reached by the business’s creditors.
Properly forming and administering a corporation or LLC can shield a business owner’s personal assets. In other words, if your business is subject to a lawsuit or fails to make a payment, you would be personally liable if you’re operating as a sole proprietor.
Tax Benefits
As a sole proprietor, your freelance income is taxable as personal income. This income may bump you into a higher tax bracket, erasing some of the financial gain your side hustle provided. Further, as a sole proprietorship, you could be missing out on some tax advantages you can leverage as a business entity. Of course, selecting the most advantageous business entity will depend on your unique circumstances and your goals.
Retirement Planning
If your retirement plan hinges on staying below a particular income level, you may want to control how much income you receive. As a sole proprietor, your freelance income is included in your personal income. But forming the right business entity allows you to control how much personal income you receive from your business.
For these reasons and more, you may want to consult with a business planning attorney and get some advice for your specific circumstances. While forming and operating a business entity such as a corporation or LLC requires up-front costs and some ongoing administrative effort, the protections and the peace of mind it can provide may well be worth it.
Meet with a Florida Business Planning Attorney
Talk with an experienced business planning attorney about your growing business. Knowing your goals and concerns will help you and your attorney find the right fit for your situation. Call our office at 561-395-6800 to schedule a meeting.