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  • Writer's pictureLindsay Spiller

Why should independent contractors form Loan-Out corporations?

Updated: Dec 31


A chalkboard with the word "Self-Employed" written on it.

As an independent contractor, you may have heard of the importance of setting up a loan-out corporation. In light of the recent change in California law (AB5), having one is now more critical than ever. Here's a quick overview of a loan-out corporation and why you should consider setting one up.


What is a Loan-Out corporation, and how can it help you as an independent contractor in light of AB5?


Under AB5, anyone providing services to another is presumed an employee unless the work involves services exempted from the law or the service provider can otherwise be shown to be an employee of another entity, and the provider's services are being "loaned out" to another entity. To fit this scenario, the loan-out entity (it could be either a corporation or an LLC taxed as a corporation - typically an S corporation) receives payment for services provided to others and pays ts service provider (typically. the owner) a salary as its employee. The entertainment industry created it to provide independent movie actors and crew members with greater flexibility and protection in managing their finances. By establishing a loan-out corporation, independent contractors become employees of their own company and receive the benefits that come with it, such as corporation tax privileges and pension rights. Additionally, the loan-out corporation offers protection from personal liability when working for companies by creating a separate legal entity that can contract out services such as writing or performing. As a result, this business structure is an attractive option for independent contractors facing new restrictions under AB5.


How does Loan Out corporation help you save on taxes?


A Loan Out corporation is an excellent way to save money on taxes, maximize your earnings and ensure you comply with the new statutory requirements of AB5. This business structure enables you to write off more expenses than a regular self-employed person so you can leverage your tax deductions. Additionally, it allows you to issue an employee salary, providing flexibility while taking out any desired dividends or profits afterward. Furthermore, this type of company furthers the need for legal protection that can be offered by having corporate documents in place. All these benefits combined make forming a Loan Out Corp an ideal method of ensuring innovative tax-saving practices whether or not AB5 applies to you or your contract work.


A Loan Out can provide multiple business opportunities and enhance your brand


Not only does having a Loan Out protect individuals from personal liability, but it also opens up opportunities for additional work that previously may not have been possible. For example, having a Loan-Out can enable an individual to be employed by multiple employers. Furthermore, having a corporate entity adds to an individual's professional credibility.


Overall, forming a Loan-out corporation is an ideal way to ensure protection and innovative financial practices in light of the new rules imposed by AB 5. It enables individuals to maximize their earnings while taking advantage of tax deductions and other benefits associated with a corporate structure. Additionally, it gives individuals more freedom to take on multiple projects without worrying about personal liability. All these benefits cement the idea of forming a Loan-Out corporation as an excellent way to stay compliant and save money when working as an independent contractor.


Are you interested in forming a Loan-out Corporation?


If you are an independent contractor and need assistance setting up a Loan-Out corporation, numerous resources are available to help. Hiring a qualified accountant is one of the best ways to ensure that you make informed decisions regarding your business structure. Additionally, many online guides and services can further assist with setting up your Loan-Out corporation.


Spiller Law is an advisor to startup businesses, entertainment and media companies, and artists. Feel free to schedule a free consultation.



 

Spiller Law is a San Francisco business, entertainment, and estate planning law firm. We serve clients in the San Francisco Bay Area, Silicon Valley, Los Angeles, and California. Feel free to arrange a free consultation using the Schedule Appointment link on our website. For other questions, feel free to call our offices at 415-991-7298.

 

The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.

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