Growing up/out.
July 9, 2010 10:31 AM Subscribe
I'm an independent contractor -- a developer for web and mobile devices (iPhone, etc) -- currently having to pull in extra developers to help out on a few larger projects. It's kind of feeling like a proto-company situation.
I'm feeling a bit out of my comfort zone and am looking for a bit of business development advice...
I guess my big question is: What do I need to do as far as creating an official business entity around this? Or do I? I would love to get to the point of hiring a full-time developer, so what do I need to get set up to make that happen? Do I need to set up an LLC? Are there tax implications I need to be aware of? Do I need an accountant? Lawyer? (I'm in NY state, btw.) I have some business sense, but I'm treading very, very gently here. I like my current situation and don't want to get into anything too time-consuming/expensive. But I would like to be prepared for any possible growth.
Has anyone else gone through this process who would like to offer up some experiences or pitfalls?
Thanks (again)!
I guess my big question is: What do I need to do as far as creating an official business entity around this? Or do I? I would love to get to the point of hiring a full-time developer, so what do I need to get set up to make that happen? Do I need to set up an LLC? Are there tax implications I need to be aware of? Do I need an accountant? Lawyer? (I'm in NY state, btw.) I have some business sense, but I'm treading very, very gently here. I like my current situation and don't want to get into anything too time-consuming/expensive. But I would like to be prepared for any possible growth.
Has anyone else gone through this process who would like to offer up some experiences or pitfalls?
Thanks (again)!
I'm an attorney, but not in New York, so I don't know the details of New York business associations, but in many states the process of creating a company, whether a corporation, LLC, or what-have-you, is complex enough that it's a good idea to at least consult an attorney.
Remember, too, that in many states if you don't set up a business entity then your operation will be treated as a partnership by default, which entails a lot of financial and legal risks that you may not be aware of. It really behooves you to consult a competent attorney in New York, if only to find out what risks you may be running by not creating a business entity or drafting contracts that protect you (or both).
posted by jedicus at 10:40 AM on July 9, 2010
Remember, too, that in many states if you don't set up a business entity then your operation will be treated as a partnership by default, which entails a lot of financial and legal risks that you may not be aware of. It really behooves you to consult a competent attorney in New York, if only to find out what risks you may be running by not creating a business entity or drafting contracts that protect you (or both).
posted by jedicus at 10:40 AM on July 9, 2010
I like my current situation and don't want to get into anything too time-consuming/expensive.
I should add that times are tough for attorneys (as they are for just about everyone), so don't be afraid to call around to a couple of different attorneys and ask about free initial consultations, which they should be happy to offer. Then, at said consultation, don't be afraid to get right down to brass tacks about cost (after discussing the facts of your situation, of course). If the attorney doesn't bring it up, suggest a fixed-fee arrangement, and don't be afraid to negotiate. It's a lot easier to negotiate a fixed-fee than an hourly rate, and you'll know what you're getting into in advance.
posted by jedicus at 10:57 AM on July 9, 2010
I should add that times are tough for attorneys (as they are for just about everyone), so don't be afraid to call around to a couple of different attorneys and ask about free initial consultations, which they should be happy to offer. Then, at said consultation, don't be afraid to get right down to brass tacks about cost (after discussing the facts of your situation, of course). If the attorney doesn't bring it up, suggest a fixed-fee arrangement, and don't be afraid to negotiate. It's a lot easier to negotiate a fixed-fee than an hourly rate, and you'll know what you're getting into in advance.
posted by jedicus at 10:57 AM on July 9, 2010
Remember, too, that in many states if you don't set up a business entity then your operation will be treated as a partnership by default, which entails a lot of financial and legal risks that you may not be aware of.
Not quite - partnership implies more than one owner. If it's just you, it'll be considered a sole proprietorship.
The number one thing you need to deal at this point is taxes when starting your own operation. So, start with an accountant. A real CPA. See what he has to say. He'll have advice on how to categorize assets and services, and how to deal with your own employees / sub-contractors, from a tax perspective. You'll get good practical business-building advice from a good CPA, as one of the primary purposes of establishing a business entities is to deal with taxes.
It's good that you are beginning looking into the benefits and pitfalls of getting a limited partnership (LP), a limited liability partnership (LLP), a limited liability corporation (LLC), and an actual corporation. Your CPA can give you some advice on the tax benefits of each.
Of course, you can't rely solely on your CPA's advice; some CPAs think they know more than they do about building businesses. So, once you want to actually set one up, you'll really want to consult with a lawyer.
Technically, you don't need to set up some business entity to do what you want to do. But you will have to deal with taxes in any case.
IANYL, TINLA etc.
posted by jabberjaw at 11:35 AM on July 9, 2010
Not quite - partnership implies more than one owner. If it's just you, it'll be considered a sole proprietorship.
The number one thing you need to deal at this point is taxes when starting your own operation. So, start with an accountant. A real CPA. See what he has to say. He'll have advice on how to categorize assets and services, and how to deal with your own employees / sub-contractors, from a tax perspective. You'll get good practical business-building advice from a good CPA, as one of the primary purposes of establishing a business entities is to deal with taxes.
It's good that you are beginning looking into the benefits and pitfalls of getting a limited partnership (LP), a limited liability partnership (LLP), a limited liability corporation (LLC), and an actual corporation. Your CPA can give you some advice on the tax benefits of each.
Of course, you can't rely solely on your CPA's advice; some CPAs think they know more than they do about building businesses. So, once you want to actually set one up, you'll really want to consult with a lawyer.
Technically, you don't need to set up some business entity to do what you want to do. But you will have to deal with taxes in any case.
IANYL, TINLA etc.
posted by jabberjaw at 11:35 AM on July 9, 2010
Not quite - partnership implies more than one owner. If it's just you, it'll be considered a sole proprietorship.
I should clarify that the implied partnership is a danger of "currently having to pull in extra developers to help out on a few larger projects." That is, if things are not set up properly to avoid it, you and the other developers may be viewed as partners.
posted by jedicus at 12:01 PM on July 9, 2010
I should clarify that the implied partnership is a danger of "currently having to pull in extra developers to help out on a few larger projects." That is, if things are not set up properly to avoid it, you and the other developers may be viewed as partners.
posted by jedicus at 12:01 PM on July 9, 2010
Response by poster: Thanks for the advice, everyone! I think I'm going to go the route of talking to an accountant... It seems like taxes are actually the major issue, here.
Related question: Anyone have good accountant recommendations for this kind of thing in New York City? ;-)
posted by chasing at 12:50 PM on July 9, 2010
Related question: Anyone have good accountant recommendations for this kind of thing in New York City? ;-)
posted by chasing at 12:50 PM on July 9, 2010
You don't need an attorney for this. You can form an LLC by yourself with information from NOLO press books, and the NY Secretary of State's office. If you're going single-member, there aren't really any gotchas. Your accountant should explain the benefits and costs of electing S-Corporation tax treatment and can prepare that paperwork for you. If you're making over $120K or so, it's probably worth it for the tax savings, but you'll need to run the numbers for yourself. If you're going with an S-Corp election, do it promptly. There is a deadline!
Be sure to be aware of city taxes and business registration requirement in addition to the state and federal paperwork. A good accountant will point you to all the right places. Also, get your accountant to set up your company books for you (or fix them up if you've been doing them already) and give you instructions for how to enter all of the basic transactions your business does, so that everything is nice and tidy at tax time. If bookkeeping occupies more than an hour or two of your time every month, hire a part-time bookkeeper; I'm sure your time is better spent building your business. But if someone else is doing your books, be sure to review them very regularly so you know what's going on with your financial picture.
Because you now have individuals working for you, you must apply the IRS's tests to determine whether they are independent contractors or employees. This is one area where an employment attorney's advice may really be desirable, as the financial consequences of the IRS determining that a contractor was really an employee can be staggering (back payroll taxes, maybe even back withholding!) The IRS looks very carefully at technology contractors in particular.
You could go the safe route and just put everyone on the payroll. Your state's employment development office can provide you with all the information about forms that need to be filed, etc. If you're going the LLC route, get that set up first and register for an EIN with the IRS, set up a business checking account, and so on. Then register as an employer and sign up with a payroll service. You'll need to do I-9 and W-4 forms for all your new employees and keep those on file. Don't forget to get worker's comp. insurance, as well, if you are required to do so.
I use Intuit Online Payroll and can't complain. It's cheap, and they handle direct deposit, e-file, and e-payment of taxes, so I never touch any paper. They also send reminders before payroll needs to be approved, forms filed, or taxes paid. Integrates with QuickBooks (of course) via downloaded IIF files. Recommended.
Don't bother trying to do payroll yourself. Just trying to figure out how much to withhold for one person's salary will waste more of your time than a whole year's worth of payroll service fees, and if you get it wrong, it will be even more expensive!
In general, I recommend that you deal with the increasing administrative complexity of your business by outsourcing it as much as possible. If you're like me, I'm sure you enjoy software development and growing your business much more than pushing paper around all day--and it pays a lot better, too!--so seek out competent helpers and outside services to handle all of that for you. Basically everything can be done by email, web, or fax these days, so you might find it very cost-effective to hire a "virtual assistant" someplace with lower cost-of-living than NYC.
posted by brain at 1:44 PM on July 9, 2010 [1 favorite]
Be sure to be aware of city taxes and business registration requirement in addition to the state and federal paperwork. A good accountant will point you to all the right places. Also, get your accountant to set up your company books for you (or fix them up if you've been doing them already) and give you instructions for how to enter all of the basic transactions your business does, so that everything is nice and tidy at tax time. If bookkeeping occupies more than an hour or two of your time every month, hire a part-time bookkeeper; I'm sure your time is better spent building your business. But if someone else is doing your books, be sure to review them very regularly so you know what's going on with your financial picture.
Because you now have individuals working for you, you must apply the IRS's tests to determine whether they are independent contractors or employees. This is one area where an employment attorney's advice may really be desirable, as the financial consequences of the IRS determining that a contractor was really an employee can be staggering (back payroll taxes, maybe even back withholding!) The IRS looks very carefully at technology contractors in particular.
You could go the safe route and just put everyone on the payroll. Your state's employment development office can provide you with all the information about forms that need to be filed, etc. If you're going the LLC route, get that set up first and register for an EIN with the IRS, set up a business checking account, and so on. Then register as an employer and sign up with a payroll service. You'll need to do I-9 and W-4 forms for all your new employees and keep those on file. Don't forget to get worker's comp. insurance, as well, if you are required to do so.
I use Intuit Online Payroll and can't complain. It's cheap, and they handle direct deposit, e-file, and e-payment of taxes, so I never touch any paper. They also send reminders before payroll needs to be approved, forms filed, or taxes paid. Integrates with QuickBooks (of course) via downloaded IIF files. Recommended.
Don't bother trying to do payroll yourself. Just trying to figure out how much to withhold for one person's salary will waste more of your time than a whole year's worth of payroll service fees, and if you get it wrong, it will be even more expensive!
In general, I recommend that you deal with the increasing administrative complexity of your business by outsourcing it as much as possible. If you're like me, I'm sure you enjoy software development and growing your business much more than pushing paper around all day--and it pays a lot better, too!--so seek out competent helpers and outside services to handle all of that for you. Basically everything can be done by email, web, or fax these days, so you might find it very cost-effective to hire a "virtual assistant" someplace with lower cost-of-living than NYC.
posted by brain at 1:44 PM on July 9, 2010 [1 favorite]
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posted by dfriedman at 10:39 AM on July 9, 2010