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Is it better to be self-employed or incorporated?
When starting a new business, one of the first decisions you’ll need to make is whether to operate as a sole proprietorship or incorporate. There are pros and cons to each approach. In this article, we’ll compare being self-employed vs. incorporated to help you decide what makes sense for your venture.
If you operate as a sole proprietor, you and the business are considered one entity. The business is not legally separate from you as the owner. With a corporation, a separate legal entity is created that is distinct from the owners.
Pros of Being Self-Employed
The main advantages of being self-employed are simplicity and lower startup costs. Since no new legal entity is formed, you can get up and running quickly with minimal paperwork. Self-employed individuals also benefit from simplified taxation. Business income is reported on your personal tax return. This makes things simpler, but can also lead to paying higher tax rates.
Cons of Being Self-Employed
The biggest downside of being self-employed is unlimited personal liability. As a sole proprietor, you are personally responsible for any business debts or legal liabilities. This risk exposure can be very dangerous. Raising investment capital can also be more challenging without the legal structure and credibility of a corporation. Lastly, tax planning options are more limited compared to an incorporated business.
Pros of Incorporating
Forming a corporation better separates your personal and business finances. This can help to shield your personal assets from business liabilities. Incorporation also provides better branding opportunities (including name protection) and lends more credibility to your business. It can allow the corporation to access more funding opportunities, as well as tax planning options that are not available to sole proprietors. Furthermore, incorporating provides more flexibility if your business grows. It’s simpler to add additional owners or shareholders down the road and to transition ownership once it’s time to retire or sell the business.
Cons of Incorporating
The main disadvantages of incorporating are increased administrative requirements and costs. More paperwork is needed to properly set up and maintain a corporation annually. There are also annual government filing fees. A corporation has more complex tax filing and accounting obligations as well, which may require professional help. The cost to incorporate can be offset to some degree by selecting the right incorporation service provider.
Self-Employed or Incorporated: Key Factors to Consider
When deciding between being self-employed or incorporated, key factors to weigh include:
- Your business structure and potential liability risks
- Expected business income and tax implications
- Plans for future growth and outside investment
- Your willingness and bandwidth to handle administrative tasks
If you’re still on the fence about whether incorporation is right for your business, consider taking our free Incorporation Quiz. It can help you determine whether incorporation is the right choice for your needs.
You should also consider speaking with a lawyer and accounting advisor to evaluate your specific situation before opting to remain self-employed or go through the process of incorporation. They can help assess which structure makes the most sense based on your specific circumstances. Every business is unique, and there is no one-size-fits-all answer to the question of whether it’s better to be self-employed or incorporated.
In summary, incorporating comes with more upfront work but important long-term benefits. For lower risk businesses just getting started, self-employment may be the way to go initially. Just keep in mind that you are putting off a transition that most successful businesses will eventually take and that the transition will become more complicated and expensive as time passes. There are pros and cons to each approach that must be balanced. Get professional guidance to make the best choice for your new venture.