Should a Young Freelancer Incorporate? 6 Opinions for Business

What business setup makes sense for a freelancer? I asked 5 working professionals, young freelancers, and industry leaders.

Freelancing can be a bit frightening at times, especially when it comes to dealing with legalities and finances regarding your freelance business. The decisions you make will effect everything from your bank account to your branding. I think every freelancer wonders whether it’d be better to set them selves up as a business rather than an individual.

The way I see it, you have a few options as a freelancer.

Practice freelance in your area of expertise and develop a reputation on your personal name for what you do best.

Team up with a few other freelancers who are valuable for skills different than yours and build a small freelance network.

Start a one man corporation and brand yourself as a freelance company rather than an individual.

Start a company with your freelance network and take on projects as a team.

Some combination of the above.

Each of these options has a different implication for your branding and for your finances.

The Answers

Well I wondered what really makes sense for a freelancer so I asked 5 working professionals, young freelancers, and industry leaders what they thought was the best way to go for a freelancer business. Their responses are enlightening and answer a lot of questions.

( DISCLAIMER: No one answering claims to be a lawyer and for real legal advice on the subject please consult a tax professional or lawyer. )

Dave Weinberg

is the incoming President of the Maine chapter of AIGA, the professional association for design. As chief creative cat at daveweinberg.com he provides integrated cross-media design, creative and marketing services to clients. He is the creator of cellphoneSketchpad. More at daveweinberg.com

There are legal and tax benefits / protections / implications to becoming a corporation. If you are a corp and the business gets sued – they can only go after the business. If you are a freelancer they can come after your personal assets – so there is some protection. There are certain income thresholds that would make it more advantageous from a tax perspective to be a corporation as well. There are also different types of corps that can be formed – so it’s important to consult with an accountant and/or attorney to determine which is most appropriate given your business model/goals.

LLC vs S Corp
LLC vs inc
LLC vs partnership
LLC vs dba
LLC sole proprietorship

Andy Mangold

is a young freelancer and maker of things. He and a few good friends ( including myself ) operate Bonsai Studios LLC, a small design and development firm with offices in Pennsylvania and Maryland. Visit andymangold.com for his blog and beautiful portfolio.

The single biggest reason to incorporate yourself for freelance work is for legal protection. I AM NOT a lawyer, but this is my understanding of the situation: If you freelance as an individual, and you get sued for some reason (which is not so unlikely, perhaps you get a web job and crash a client’s server, or you could create a logo or piece of design that later gets the company in trouble with copyright or trademark laws) you INDIVIDUALLY can be pursued legally. Therefore, should you lose in court and be unable to pay whatever fines have been levied against you, ALL of your assets are in danger. Your house, car, computer, etc. However, if you are incorporated and should get sued for some reason, only the assets of the company are in danger. Basically that would come down to anything you have written off as a business expense on your taxes. This layer of protection would be priceless in the terrible event you do run into legal trouble as a freelancer.

Other pros of incorporation include simplification of taxes, especially for there is more than one person working under your company, actual legal protection of your design practice’s name (though that comes with the added challenge of finding one that is completely unique) and the fact that clients tend to take you more seriously. If you are a young freelancer, it is also a superb resume piece.

The downside is basically the initial set up: without personally knowing a lawyer, it will probably cost you a nice chunk of change to get the paperwork processed to become incorporated. Also, if you are just an individual, that is more paperwork for you to handle every time tax season rolls around, which either means you will be bogged down or your accountant or accounting service will charge you more.

More complicated and bureaucratic? Perhaps. Worth it? I think so.

Kerry Skarda

is the owner and president of B. Creative Group, an agile and all female core-constituency design firm located in Baltimore. Kerry has been freelancing since her college days and built B. Creative from the ground up into a successful design firm. Visit bcreativegroup.com for more.

In my experience, it is better for a freelancer to incorporate and operate as a company. It costs more up front in lawyer fees, etc, but the benefits should pay off.

When clients see you as a “freelancer,” they don’t see you as an expert. They tend to treat you like a commodity, instead of respecting what you do. Even if you are the only person in your “company,” you should always say “we” when speaking about the work you do. This not only gives the perception that you are more than a one-man-show, but allows for a natural growth in your business—if say you get successful to the point of needing to hire an employee or more.

Freelancers can also be seen as flighty and unreliable. Some clients don’t value you and some might even think it’s OK not to pay you!!! Let’s just say you probably are not going to land any big name clients as a freelancer, those types of clients want to hire a company to do their work… even if it is only little ole you actually doing all the work! It’s the perception that matters.

So IF you know you are interested in staying in the design field long-term, and have that entrepreneurial bug, then definitely operate under the persona of a company, with branding et.all. You actually do not have to incorporate to do this, you can register as a sole proprietor business… but what you must do is make sure the name you select for your company is not being used by someone else and you must register with the state in which you are operating your business. This is what you need the lawyer for.

If you just operate as a freelancer, you can basically take in work, get paid directly, deposit into a personal bank account, pay estimated taxes (A MUST) to the government and file your personal tax return… of course keeping track of every single tax deduction possible… because you can count on 35 to 50% of your gross earnings going to taxes!!! YEP, that much. I would recommend if freelancing… you take 35% of every check you get and put it into an interest bearing savings account for quarterly estimated taxes AND any tax you may owe at tax filing time. Just remember when you freelance out of your home, you have to “be creative” with your write-offs. You can basically write off everything that is even remotely business. Your phone, partial rent, cell phone, eating out, gas… etc. But you have to make sure you do this to keep your taxes low.

The first year I freelanced (right after college)… I had no idea of these things. It was just great to be working, making money, etc. Come tax time that year… I ended up owing $3K… which I did not have!!! It was terrible but a good learning experience for me.

I have found that having a good lawyer, accountant, and bookkeeper are essential. And with employees, a good payroll company is crucial. You don’t need to get bogged down in the constantly changing tax laws, unemployment rates, payroll taxes, etc…. that the accountant and payroll company take care of for you. They make all the necessary filings, on time, accurately because I certainly don’t want to deal with those things.So I’ve done both, freelanced AND incorporated. Incorporating does come with some added legal responsibility and up-front costs, but pays off in the end because you are more respected and can land larger projects, with bigger clients. Freelancing allows you freedom to not commit if uncertain of your path and doesn’t cost you a dime to start up.

Lokesh Dhakar

is a designer and developer living in Baltimore and is the creator of the Lightbox effect using javascript. His creation is widely used and he is well known for it. He also creates some fantastic information graphics and posts them on his blog. visit lokeshdhakar.com for more.

Unfortunately I’m not the best person to ask these questions. I have yet to full investigate the incorporation process and review the pros and cons. I do encourage everyone to look into this much earlier in their freelancing career than I’m doing. I’ve just recently skimmed a few sites and discussions about it. I recommend you review the discussion that occured here:
ask.metafilter.com/119894/LLC-for-freelancing

Regarding branding, even though I simply use my name, I think there are benefits to operating under a company name. To a client, an incorporated company appears more legitimate and well-established, even if it’s not the case. Also, if you’re collaborating with others, it’s easier for the client to understand (and be comfortable with) the setup of a company with an owner and network of contractors than it is to wrap their head around a one-man shop working with other one-man shops.

The advantage to using your own name is that it helps develop your name as a brand, which can’t be underestimated. And with strong, clear messaging you can pre-emptively answer, and make the client more comfortable with, any questions of legitimacy and company structure they might have.

Ellen Lupton

is a designer, writer, and type expert. She is the director of the Graphic Design MFA program at MICA in Baltimore and a professor there as well. Her book, Thinking With Type, is a highly acclaimed guide for everyday typography and is one of many of Ellen’s published works on design. For much more visit designwritingresearch.org

The decision to incorporate or not is really a tax/business decision. Whether or not you incorporate, if the company revolves around you and your services, I suggest using your own name rather than something more clever and “brand-y.” There are a number of successful designers out there who simply represent themselves online with their name.

buchanansmith.com/
deannecheuk.squarespace.com/
caringoldberg.com/

This type of identity is very understandable to clients and to the press.

Patti Chan

is a coder, designer, and chef local to Baltimore. In addition to some freelance work she is the co-founder of the site 600block.com, a resource for Baltimore’s best in restaurants, bars, and shopping. Patti is a professor at MICA in the Interactive Media department. For about Patti more visit fizzel.com

Though I’ve incorporated my business, I’ve never registered myself for the work I do as a freelancer. This is partially because so much of my time is taken by 600block (which, though incorporated, doesn’t offer web services or take clients). But I also don’t register as a named company (especially with “Studio” in the title) because I feel sometimes that can be misleading. Unless I’ve worked out a ongoing partnership with other colleagues, I don’t want to misrepresent myself as a bigger team than I actually am. If it’s truly a one-man show, I don’t think freelancers should be afraid to admit that – just be confident in the services that you do provide, and do it well.

However, there’s a legal side. Technically, there’s no benefits tax-wise – you end up owing the same whether you incorporate or not. In fact, depending on which route you take, you may have to do a lot of paperwork. As an S-Corp, we’re required to hold annual meetings with documented minutes. What registering does protect you against is personal liability. If anything goes wrong, your personal assets are safe, since lawsuits would go against the company. Many small companies and independent contractors opt for LLC’s, since it offers the protection with minimal fuss and paperwork.

Are you registered / incorporated for your freelance work?

I asked these folks, now I want to hear what you have to say. Do you think it’s better to operate as a business or would you rather stick to the flexibility and freedom of a personal brand? Are there any freelance horror stories out there about the tax man? Leave your thoughts in the comments below.