Working as a freelancer in Web3, requires careful planning and preparation. One of the important decisions that you need to make is whether to incorporate a corporate entity, and where to do so.
There are several factors that Web3 freelancers should consider in deciding whether to set up a corporate entity - or not.
This guide provides a framework to help you think through these decisions in your own circumstances. But you should always seek professional advice from qualified persons like tax advisors and lawyers who can help you understand your own unique situation.
1. What’s your endgame?
As a web3 freelancer, the question you need to ask is: what is your endgame?
Robert Kiyosaki’s book series, “Rich Dad, Poor Dad”, is one of the many popular works that freelancers will read along their entrepreneurial journey. Although much of the books are likely fabricated, the “Cashflow Quadrant” is one of the useful insights one can sieve from the muck.
It is a model representing the four different methods by which one can generate an income: as an employee, a self-employed person, a business owner, or an investor.
If running a company is your goal - then do it from day one. If you ultimately plan to start an agency offering services to Web3 projects, hiring other people to help you scale your operations, then setting up a corporate entity is a must.
But freelancing for many, is just like dating.
It could be this temporary state through which they can explore the space, and dip their toes into various projects before deciding on the “one”. If your goal is to join a project or company as a full-time employee, then setting up a corporate entity may not be necessary.
Then there’s a third category: people who work multiple jobs at a time, holding multiple “full-time” roles at different projects - and want to keep it that way.
But even if you plan to be a solopreneur, or a serial employee holding down multiple roles at once - there may be other good reasons to consider setting up a corporate entity.
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2. Lower income taxes
Capital is taxed at lower rates than labor in most jurisdictions around the world. So if you’re trying to pay lower taxes - you may be better off engaging your freelance clients through a corporate entity.
A study published in 2017 in the Peterson Institute for International Economics, found that most advanced and large emerging economies have higher top marginal personal income tax rates than statutory corporate income tax rates, by about 10% on average.
Why? Governments have realized that corporations can shop countries for the best rates or lobby for loopholes, but individuals do not have the same resources.
According to the non-profit research center, Tax Foundation, the worldwide average statutory corporate income tax rate, measured across 180 jurisdictions, is 23.37 percent. This figure also has consistently decreased since 1980.
There are of course caveats to this. Depending on how much you earn, and the structure of tax brackets in a given jurisdiction, you may actually end up paying less taxes on smaller incomes as an individual than through an entity.
For instance, in Singapore, corporations pay a flat tax rate of 17%, while the highest personal income tax rate is currently 22%. But you would have to be earning about $120,000 USD a year for your personal income tax to reach 18%.
Broadly speaking, the more you earn as a freelancer, and the more aggressively your jurisdiction’s tax brackets ramp up - you may pay less in income tax by booking all your income and expenses through a corporate entity.
Note that there may be limitations to this, as we will explore below.
3. Limited liability
Liability here refers to the extent to which you can be held personally responsible in a court of law - particularly when something goes wrong.
As a freelancer, you may find it prudent to engage with your clients via an entity, instead of yourself. Corporations are generally treated as “legal persons”. That means they can be used to limit your personal liability. This may be important to Web3 freelancers, especially while contributing to DAOs.
Before the invention of corporate entities, everybody had unlimited personal liability for anything that happened to one of their ventures. Such high risk deterred investors and dampened employment and economic activity, until the advent of limited liability corporations ensured they would avoid personal bankruptcy.
DAOs without a corporate entity could be deemed unincorporated partnerships. This exposes all their members to unlimited personal liability. In the case of a lawsuit, all members could be jointly and severally liable.
A U.S. court in California has ruled in favor of plaintiffs who alleged that the bZx protocol, and governance token-holding members of its decentralized autonomous organization (DAO), were negligent and liable for losses resulting from a hack that drained its $55 million treasury.
If a DAO is hacked or crashes, users could conceivably sue every identifiable member for damages and hold them liable for the lost funds. Suppose a crashed DAO had 3,230 members and held $4 billion worth of cryptocurrency in its treasury. Each DAO member (including you) could be liable for as much as $1.2 million!
In contrast, if you use a corporate entity like an LLC to interact with your Web3 freelance clients, plaintiffs or creditors can only seek legal redress against the corporate entity, and not your personal assets.
However, this is not a bulletproof tactic. In many jurisdictions, there are conditions which allow courts to "pierce the corporate veil", or put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation’s actions or debts.
For example, in March, Sushiswap’s legal entity, and Head Chef Jared Grey both received subpoenas from the U.S. Securities and Exchange Commission (SEC).
In summary, incorporating a corporate entity as a freelancer in Web3, can have some advantages, such as:
- - Protecting your personal assets from liability
- - Enhancing your credibility and professionalism
- - Reducing your tax burden and optimizing your accounting
But incorporating an entity is just the first step. You’ll have to run the administration associated with that entity on top of your freelance work. This adds a layer of complexity that you must be prepared for.
Before incorporating a corporate entity, you should consider factors such as:
- - Your business goals and vision
- - Your expected income and expenses
- - Your preferred legal structure and ownership
- - Your target market and clients
- - Your tax obligations and benefits
- - Your risk exposure and protection
As with all decisions, the costs of setting up and operating a corporate entity for your Web3 freelance work should not outweigh the benefits.
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