To incorporate or not? That is the question

Originally published on February 2022, update on February + April 2023 for relevancy

Everyone’s usually surprised that after years doing my own consulting, I’m “still” a sole proprietor and not incorporated. Because the answer is always "it depends"... it depends on your risk tolerance and ability to find products and services that can help you reduce that risk.

Here are the trade-offs I’ve optimized for, in making this decision. Please note: this is not legal or accounting advice; please consult your lawyer and tax advisor to figure out what works best for you.

It’s not an easy question to answer. Here are some resources, questions and considerations to help you.

Considerations for Incorporating

There are many, many resources out there that discuss the pros and cons of incorporating, including:

Why You Should Consider an LLC the Right Choice for Your Freelance Business, by Freelancer's Union
Sole Proprietorship vs. Incorporation: What’s the Difference?
Incorporation 101: How to Incorporate a Small Business
Considerations for Running an Independent/Small Statistical Consulting Business, in collaboration with American Statistical Association's Section on Statistical Consulting

One of the biggest advantages is that only your business (and not you personally) are liable for any lawsuits or debts [ref].

If you decide to incorporate, should you incorporate in your state or in Delaware?

Here’s why Delaware is the go-to destination for incorporating a business -- and the pros and cons to doing so.

By incorporating, you are limiting your risk, but you do need a lawyer that's able to work with a Delaware registered agent, and you'd also need a tax professional with expertise with tax strategy for your type of business and personal situation. I’ve personally found it really hard to find this expertise.

Considerations for Sole Proprietor

Registered as a sole proprietorship with your city. Here’s what this looks like in Los Angeles.
You are now personally liable for your business. You still need a lawyer; they should be licensed in your state (and potentially your client’s state), to help you red line contracts to reduce your risk and liability.
Your taxes may get more complicated, but it’s possible to (mostly) DIY, for better or for worse.
As a consultant who takes compensation in equity (as an advisor) and cash, or a combination of the two, I’ve found that start-ups are more amenable to equity compensation to individuals, rather than to corporations.

Other Considerations

If risk is not a factor, do you expect to make more money in your business to justify the incorporation fees and renewals?
You may want to consider incorporating if you'll have direct reports in your business – or expect to hire contractors.
Regardless of whether you are incorporating or not, you may want to consider business insurance to further mitigate risk.

Good luck -- let me know what you decided on!