Hints, tricks, or hacks for moonlighting, freelancing, or consulting work?
September 11, 2011 9:47 AM   Subscribe

Hints, tricks, or hacks for moonlighting, freelancing, or consulting especially in regards to setting up a LLC and setting fees?

I am considering doing a small amount of consulting work out side of my full time position. The work will be initially focused on analysis and redesign of a product. I don’t see any conflicts with my current position as they are in totally different markets. I have a few questions regarding protecting myself legally and setting billing rates.

In addition, any other hints, tricks, or hacks you can provide about moonlighting or freelancing would be appreciated.

1) If I am only doing a small amount of work per week (5 to 10 hrs) for a single company should I bother to form an LLC?

2) I would like to subcontract another individual to help me out with some of the work because of his specialization. Would I have to hire them as a 1099 contractor or can I just pay them person to person so we don’t have to deal with the 1099 forms and quarterly estimated tax payments. Is it possible to do this if the overall contract is with a LLC that I form?

3) I am having difficulty determining pricing/fee structure for one portion of the work. I will be offering take their existing design and optimize it. This portion of the work is where value will really be added. The optimization will be done in a semi-automated fashion so billing by an hourly rate doesn’t make sense to me. Ideally I would like to receive a passive income stream by licensing a new/optimized design. However, it will be very difficult to anticipate the annual rate of sales of this product as it is essentially new. I see a couple of potential options for setting up billing?
-Fixed Fee
-Fee for each unit sold
-Fixed Fee + Fee for each unit sold

4) Are there any other legal structures or requirements I should look into?

5) Any other hints, tricks, or hacks you can provide about moonlighting or freelancing?
posted by cycleback to Work & Money (11 answers total) 14 users marked this as a favorite
The feasibility of an LLC is dependent, in part, on where you live. Most, if not all, states in the US recognize them. Not sure about the rest of the world.

An LLC offers your personal assets limited protection from being seized in the event that someone sues your business. Depending upon your financial condition this may or may not be a concern.

Your best bet is to speak with a CPA or else a lawyer about the benefits and drawbacks of establishing an LLC given your personal situation.
posted by dfriedman at 9:57 AM on September 11, 2011

A further point on LLCs - Unless you plan to set up an office and perhaps get a company car, don't bother. The courts don't look kindly on individuals using LLCs solely to shield their assets. As I understand it (IANAL), the key point involves whether or not you actually give the LLC itself (as distinct from you) some assets that the courts could seize - And basic office equipment and a car go a long way toward satisfying that.

As for what to charge, ALWAYS bill by the hour or some very short-term unit of effort (for example, in laying network cable, a lot of guys will bill by the drop). Specifying a large price due on project completion will result in you getting jerked around with "minor" tweaks to the project for months or even years.
posted by pla at 10:04 AM on September 11, 2011

Response by poster: I am in a US in a state that recognizes LLCs. I am hesitant to bill by the hour because I don't really have a great sense of how long the job is going to take me and I think the company may be scared by my hourly rate. I wanted to keep my hourly rate high without scaring off the company till I can establish how long jobs are realistically going to take.
posted by cycleback at 10:41 AM on September 11, 2011

1. I've been a freelancer for 20+ years and never established an LLC. I've never had a lot of liability exposure either. I know that you can get something like malpractice insurance for just about any profession, but I've never done that either.

2. If you're going to be paying the contractor more than $650 (?), you need to issue him a 1099 at the end of the year. Period. Quarterly tax deposits are his problem, not yours. Yes, you could have your LLC issue him the 1099—it doesn't need to come from an individual (but it can).

3. If you agree to a fixed-fee arrangement, make sure that you have a contract that spells out very clearly what they're getting for that fee, so they don't keep coming back to you with changes and requests for additional stuff that they assume is just getting rolled into the original contract. I would be reluctant to make a royalty payment my only or primary source of income from any project (unless it turns out to be a blockbuster). I want to know what I'm getting out of the project, and if there's anything on top of that, it's gravy. You might have different priorities, where you can afford to do it "for fun" and gamble on a bigger payout from royalties.
posted by adamrice at 10:56 AM on September 11, 2011

It's better to bill for output, rather than per hour, and then be very clear about what that output is going to be, so that if scope increases you have the ability to bill per hour.

Explaining what you bill per hour is not great (unless your client is an enterprise and deals with a lot of consultants and other vendors who typically charge market rates), because people will focus on that versus the project itself.

And, while it is important to be efficient, and to make sure you are fairly compensated, in the beginning, at the start of your consulting career, it may require that you provide some flexibility in order to develop goodwill and build on the relationship.

Typically, I provide a lot of high level advice and background information for free initially, because this will result in the client coming back time and time again, or referring me to someone else.
posted by KokuRyu at 12:24 PM on September 11, 2011

I've been looking into this a lot recently myself. I was considering setting up the LLC just as a way of having a distinct structure separate from my own personal assets that would look more legitimate to vendors, clients, etc. However, one of the biggest obstacles is the cost associated with setting up an LLC. The publication requirements in a place like NYC are in the thousands of dollars! I think that is absolutely ridiculous (but I guess I understand what all those endless tiny print sections of the newspaper are for). For me, that cost is a pretty big hurdle for even starting the business -- I would hopefully pay that off in revenue, but I don't have the funds to pay for something like that up front. Perhaps your expected revenue or immediate cash flow would be such that it wouldn't be a problem, but it may be something worth factoring in.

Another thing I was thinking that may influence the choice is whether there would ever be a situation where a client would sue you for something where you would need that protection? Also, do you ever see this thing growing in some huge way that you would want to bring in investors or sell the company -- if so, than you may want to consider setting up as a corporation since it is a bit trickier to do that as an LLC I've heard.

As for freelancing tricks -- this is one of my favorites: make sure you have two bank accounts or at least a separate savings account from your checking account within your primary bank. Every month, set aside the money that you will need to be paying in taxes, and move it into that account so that is out of sight (or at least out of easy ATM access). I have a separate savings account in my main bank account -- I gave it a name on the bank's website something like "Savings for Taxes" and put a set portion of each month's earnings in there. That way, you don't get in the mode of thinking you are earning more than you are. Perhaps you already are on top of that, but if you aren't used to untaxed earnings, that can be a big change.
posted by This_Will_Be_Good at 12:42 PM on September 11, 2011

If you agree to a fixed-fee arrangement, make sure that you have a contract that spells out very clearly what they're getting for that fee, so they don't keep coming back to you with changes and requests for additional stuff that they assume is just getting rolled into the original contract.

No matter how solidly you think you've got it nailed down in writing, there can always be disagreement between the client and the contractor about when something is done. And that's going to leave one of you with bad feelings--either you're going to expend additional effort for no additional money, making the client happy, or they are going to feel ripped off if they are charged additional for change requests when they feel it's not really a change they are asking for but something that should have been part of the original project.

After having seen scope creep occur over and over and OVER when employed as a web developer. I decided never to price by project as a freelancer. I always bill hourly, and it has been totally fine and headache-free. If you are billing hourly, keep your client apprised of how many hours have been spent, and bill them every X weeks or every time N number of hours have occurred.

You could reduce your hourly rate for this project and also add a percentage of sales too.
posted by parrot_person at 3:07 PM on September 11, 2011

Response by poster: One concern I have with using a sole proprietorship instead of an LLC is for design liability. The client wants me to design a product used in a transportation application which they would manufacture and sell. I have heard that LLCs don't provide much in the way of liability protection from design (E&O) related lawsuits. Has this been peoples experience? In some ways it seems that professional liability insurance would offer more protection though it is expensive and I am not sure I will do enough work to justify it. The only other real advantage I see to using an LLC is that the client doesn't need to file a 1099.
posted by cycleback at 4:11 PM on September 11, 2011

My friend and I set up a proprietary limited company (rough Australian equivalent of your LLC) in the 80's and bought it the TI 99/4A computer on which we were going to make our fortune writing software.

We hadn't written any software at the time, and we did this against an accountant's advice because we were smart and we were sure we knew it was what smart people did.

The whole thing was a pain in the arse. It sucked up more money in accountant's fees and assorted statutory fees than we ever made from software sales.

My best advice to you is don't bother to incorporate unless and until (a) your sole-trader activities are generating so much revenue that incorporation overhead won't matter to you and (b) you're taking on work that actually does give you a specific reason to believe you might get sued.

Me, I'd just pick my clients in ways that made the risk of (b) completely negligible.
posted by flabdablet at 4:13 PM on September 11, 2011

I'm also an advocate for the hourly rate method, but I found this recent post on The Dark Art of Pricing to be fairly helpful and convincing for the project pricing approach.

You might also consider using a contract to navigate some of the legal aspects of the assignment. You could browse a book like this to see if it might have something pertinent to your project.

In any case, good luck with it.
posted by zueod at 8:59 PM on September 11, 2011 [1 favorite]

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