If you’re thinking of incorporating yourself as a consultant, then you might find yourself wondering if it’s worth the effort. There are lots of reasons you should consider starting a corporation for your consultancy. Granted, corporations aren’t right for everyone, but they’re definitely worth considering.
In this guide, we’ll cover the basics of forming a corporation for a consultant business, including what a corporation is, its benefits and drawbacks, and an alternative.
What is a corporation?
A corporation, sometimes called a profit corporation or business corporation, is a popular business entity structure in the United States and abroad. A corporation is owned by shareholders and governed by a board of directors. Many corporations appoint a CEO, president, and other officers to handle the day-to-day management of the business, too.
Corporations are the only business type that can sell shares of stock to raise capital. With that privilege comes a lot of corporate formalities, including holding shareholder meetings, creating bylaws, and more.
As a consultant, should I incorporate?
One of the luxuries of operating as a consultant is that you have options. You can choose to stay an independent contractor, operating as a sole proprietorship. But you also have the option to create a registered business, including incorporating. Many consultants actually find the benefits of a corporation to be well worth the extra effort to create one.
Let’s look at those benefits.
Limited Liability Protection
In our opinion, the single biggest benefit to creating a corporation for your independent consultant work is personal liability protection. Operating without registering with your Secretary of State — as a sole proprietorship — is perfectly legal as long as you have any required licenses. But from a legal standpoint, you and your business will be the same legal entity. If your business is sued or defaults on a loan, your personal assets can be seized to pay the debt.
In contrast, when you create a corporation, you form a separate legal entity. The corporation can be held liable (and be sued) for its own debts. Its corporate veil usually protects you, the owner, from its liabilities. Typically, if the corporation is sued, creditors can’t come after your personal assets. They can only seize business assets.
Easier Time Separating Your Business and Personal Accounts
When you operate as a sole proprietor, it’s recommended to keep your personal finances separate from your business ones. It can be tricky to manage that if you’re operating from a single bank account. But as a corporation, having separate accounts is actually a legal requirement. Not separating your business accounts can compromise your corporate veil.
Thankfully, forming a corporation necessitates getting an employer identification number (EIN), which in turn allows you to get a separate business bank account (most banks require an EIN for opening a business bank account).
Tax Savings
You might be wondering, “How on earth can a corporation save me money on taxes — aren’t they subject to double taxation for their business income?” And you’re correct; corporations do pay taxes on two levels: once at the corporate level (under the corporate tax rate) and again on the individual level (at personal tax rates). But in some cases, being taxed as a C corporation, or better yet, an S corporation, can actually save you money on self-employment taxes. It also allows you to qualify for certain tax deductions.
Many consultant businesses can qualify for S corporation status, which gives you two main perks. First, you can still pay pass-through taxes at personal income tax rates. But you can also pay yourself a reasonable salary like an employee, potentially reducing your tax liability for employment taxes. Instead of paying self-employment taxes on all your profits, you would only pay them on your salary. This could be a difference of thousands of dollars in some cases. You wouldn’t have that luxury as a sole proprietor.
Note: taxes can be extremely complicated. A tax benefit for one business might increase the taxable income for another. If you’re curious whether being taxed as a corporation would save you money, we highly recommend consulting with a licensed tax professional.
Increased Credibility
The general public is very comfortable doing business with corporations; the “inc.” designator adds a lot of legitimacy to a business name. Doing business as a sole proprietor is perfectly legal, but unfortunately, some potential clients just aren’t as comfortable working with sole proprietors. Whether they’re just leery of it or genuinely prefer working with businesses that are accountable to the state, it’s a common reality.
If you operate as a corporation instead, you’re less likely to encounter issues with customer confidence. Your business will be a recognized, separate legal entity.
Ability to Raise Funds by Selling Shares
Starting up a business is expensive. Whether you need supplies and equipment, new office space, your first employee, or anything in between, the costs add up quickly. If you’re a sole proprietor, your options for raising start-up capital are limited. Loans and grants are your most viable options.
However, if you’re a corporation, you have the option to sell shares of stock to raise capital. This does, of course, come with strings, such as registering with the U.S. Securities and Exchange Commission (SEC) for public offerings and regular reports and shareholder meetings. But for many businesses, it’s worth the effort.
Ability to Do Business Internationally
Even as a solo operator, you never know what opportunities will come your way. It’s possible that you might even find yourself with potential international clients down the road. If that happens, you’ll be most successful with a corporation. That’s because a corporation is recognized internationally (in many, but not all countries). Without a corporation, serving international clients would be difficult — if not practically impossible.
Granted, this advantage doesn’t matter to every business owner, but it’s worth mentioning.
Disadvantages of Incorporating
Incorporating your consultant business has a lot of benefits, but it’s not right for everyone. There are some drawbacks. For one, there’s a rigid management structure to a corporation: a board of directors and officers, at minimum. And depending on your state, you may be required to have multiple directors or officers (state laws vary).
Corporations must also uphold corporate formalities, so you’ll have to deal with a good bit of red tape every year. You’ll also have to deal with state filing fees, such as filing your Articles of Incorporation, submitting your annual report, and more. None of these disadvantages are insurmountable, but they might mean a corporation isn’t quite the right fit for you.
Alternative: Forming an LLC for Your Consultancy
If you’re not sold on forming a corporation for your consultancy, a limited liability company (LLC) might be a better business structure for your needs. Like a corporation, an LLC consultancy offers personal asset protection for its owners. It’s also better favored by cautious customers because it’s a separate entity that’s accountable to the state. You still might be able to elect S corporation status to save on self-employment taxes. But you’ll also be taxed as a pass-through entity by default.
One key advantage LLCs have over corporations is that they’re much more flexible to manage and easier to run. In all states, LLCs can be owned by a single member (a single-member LLC) or multiple members (multi-member LLC). And the members ultimately get to decide how the business is managed. For many consultants, that flexibility is desirable.
We can help!
No matter where your consultant business takes you, you don’t have to go it alone. Here at ZenBusiness, we handle the red tape side of business so consultants can focus on their clients. Whether you need help starting your first LLC or corporation, an app for managing your business financials, a registered agent, or anything in between, we can help.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
FAQs
How do I protect myself as a consultant?
Generally speaking, the best way to protect yourself as a consultant is to register as a corporation or LLC, as those business types offer limited personal liability. Sole proprietorships don’t. Beyond that, be sure to use carefully crafted contracts with every client to help protect you from legal liabilities.
We also recommend checking out our guide for what you should know about business liability.
What are the risks of being a consultant?
Any business comes with inherent risk; as a consultant, one of your biggest risks is that an unhappy client might attempt to sue you. Incorporating or forming an LLC mitigates that risk by protecting your personal assets from being seized.
How do I brand myself as a consultant?
Branding yourself as a consultant isn’t much different from marketing a product; the key difference is that the product you’re selling is, well, you. And to build your client base, you have to sell yourself!
As a result, you’ll want to clearly communicate who you are and what value you can add to your potential clients’ lives. It’s also important to communicate your brand message consistently.
Consulting Business Resources
