Self Incorporated Meaning: Everything You Need to Know
The self incorporated meaning refers to self-employed individuals who set their businesses up as a corporation for tax purposes. 3 min read
The self incorporated meaning refers to self-employed individuals who set their businesses up as a corporation for tax purposes. It's common for people who work as sole proprietors to make this change, which gives them personal liability protection.
Reasons for Self-Incorporation
Many small business owners — particularly freelancers — wonder if they really need to incorporate their company. There are several benefits that sole proprietors gain when they incorporate themselves.
One reason to change your company from a sole proprietorship into a corporation is to show everyone that you're serious about your business. You obtain more credibility with potential clients and customers when you operate a corporation.
There's the important benefit of protection from business liability as well.
When your business name includes “Corp.” or “Inc.,” it gives you credibility as a corporate entity. Because corporations are their own entities, they can outlive their owners. The corporation's lifespan doesn't depend on how long someone lives. This is different from partnerships and proprietorships.
Corporations can continue indefinitely until one of the following occurs:
- It merges with another company.
- It accomplishes its objective.
- It goes bankrupt.
You can take comfort knowing that your ownership interest in the business can be given to a family member, transferred, or sold. All of an individual owner's privileges are represented by the number of shares he or she holds in the corporation.
Depending on the industry you're in, some clients might prefer dealing with a corporation over a sole proprietor. You might also attract higher-quality workers.
Typically, someone who self-incorporates has an easier time borrowing money from lenders than if he or she operates a sole proprietorship. Due to liability concerns, many banks and lenders feel more comfortable doing business with a corporation rather than a sole proprietorship.
To attract investors and grow your business, you can raise capital by selling stock shares.
When you self-incorporate, it's often easier to keep personal and business income separate from one another. This helps you legally distance yourself from your business. As a result, you may find tax time easier to manage.
C corporations are more complex, so they're typically recommended for large businesses that employ people. An S corporation is similar to a C corp, but you only have to pay taxes as an individual, so you avoid the double taxation that C corps are subject to.
The following example shows the difference in taxation between an S corporation and a sole proprietorship:
- Sole proprietorship: You're a virtual assistant who makes $50,000 a year in your own business. With this amount of income, you owe self-employment tax (which includes Medicare and Social Security taxes) and ordinary income tax on the full $50,000.
- S corporation: If you make $50,000 per year as the sole owner of an S corporation, you can leave some money in your business or take distributions. These amounts of money aren't subject to self-employment taxes. Therefore, you could take home $30,000 in wages and $20,000 in distributions. You'd pay no self-employment taxes on that $20,000, which saves you a good deal of money.
Because incorporation separates your business from you personally, you may feel like you have some freedom to take business risks to grow your company. You may lose your initial investment in the company, but that would typically be your only loss.
The personal liability protection works for you even if your corporation goes out of business. You're unlikely to lose your personal property should that happen. By contrast, sole proprietors can be personally liable for business debts.
For example, if you don't make enough income to satisfy a business loan or you lose a court case for breach of contract, a creditor or other party may go after your personal and business assets. That leaves your personal bank accounts, real estate, investments, and even your vehicles at risk.
It can take some time to self-incorporate. You'll have to file specific paperwork, depending on your situation.
Filing the wrong paperwork can have a negative impact on your business and distract you from your company's day-to-day operations. Since this is a big step, you might want to consult with legal, financial, and tax experts if you wish to go that route.
If you need help with self-incorporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.