October 31, 2012 7:46 AM   Subscribe

Potential freelance client wants to hire me; their lawyers say they can only work with incorporated vendors, not sole proprietors. For a variety of reasons (see inside) I'd rather not go through forming an LLC if I can avoid it. ISTR there are umbrella organizations freelancers can sign on with to handle this sort of situation, but am failing to google them up now that I need one. Potential difficulty factor: rural Massachusetts.

Reasons for not incorporating: it would take too long, primarily (the job needs to start almost immediately). It's also an expense, and a hassle, and complicates my taxes, and -- well, I know this is irrational, but many years ago I went through incorporating years ago for a different client for the same reason and about a week later the job fell apart, which kind of soured me on the whole idea. (That LLC is long gone, unfortunately.)

I know about freelancers union, but that appears to be just for health insurance; what I need is someone I can bill through.

Extra credit question: why do legal departments do this? What's the advantage to them of working only with vendor companies, not sole proprietors? (They've told me it's only partly because of the MA independent contractor law, they'd still require this even if I lived elsewhere.)
posted by ook to Work & Money (13 answers total) 4 users marked this as a favorite
Maybe Elance.Com would fit the role as an intermediary. Not sure how it plays with their need for an incorporated vendor, but its worth a try.

Just be aware that there is fee that Elance tacks onto the job of 8.75%. So figure that into your costs. Also, there is some weird math when calculating it, so you have to keep an eye on final cost. It is all legit, but they have a method where they subtract the freelancer's fee from the overall job cost. There is some mathematical name that I cannot remember right now, but it makes sense.
posted by lampshade at 7:58 AM on October 31, 2012

Response by poster: Ah, good suggestion, but looks like elance's cut is 20% for this sort of thing, which would put this well into not-worth-it territory. (I'd expect to pay some percentage, of course, but hopefully less than that...)
posted by ook at 8:14 AM on October 31, 2012

IANYL, TINLA. Incorporating (at least in Oregon and California) is a few minutes online. If you're a freelancer / sole proprietor / contractor-type person, you should have formed an entity and do your work through it. Taxes shouldn't be much different than what you should be doing anyway (I believe the rules you're supposed to follow are mostly the same between sole-prop and single-member LLC), and in any case, they're complex enough that it's worth hiring a bookkeeper who knows how to do it right. An LLC formed for the purpose of doing the sorts of work you regularly do, can live beyond any individual job -- you don't have to form a new one every time you get a new gig.

TL;DR: set up an LLC. It's worth it.

Legal departments are worried that somebody they try to hire as a contractor, will instead be deemed an employee, exposing the company to fines, back taxes, unemployment insurance, worker's comp problems, etc. States are going after this, because it's free money for them, and hey, who doesn't like free money?
posted by spacewrench at 8:22 AM on October 31, 2012 [1 favorite]

Forming an LLC does not complicate your taxes, as the income from the LLC "flows through" to your Schedule C just like all your freelance income. Your accountant will know how to handle it, in any case, so let him or her worry about the details.

You should be incorporated for your own protection. If you screw up and cause a client serious damages, they may sue you; having an LLC means they can't come after your house or other personal possessions. It also does not take long: in MA, you fill out a form and the LLC exists immediately upon filing it. The $500 filing fee is cheap insurance for liability protection for life.
posted by kindall at 8:29 AM on October 31, 2012

Best answer: Nolo can help you file the MA LLC forms for $89-300 depending on turnaround and add-ons. The expedited package can be turned around in about 3 business days.

Looks like you can file online for an LLC yourself too.
posted by barnone at 8:37 AM on October 31, 2012

but looks like elance's cut is 20% for this sort of thing

But cannot you just be a freelancer? Or do they need a true payroll service? If PS is required, yeah, Elance is not the best choice. They talk a nice game but they price themselves out all the time.
posted by lampshade at 8:46 AM on October 31, 2012

Response by poster: Yeah, I guess that's the best route, much as I hate to admit it. I have a good lawyer, but he's expensive; for these purposes it might be better to go the simple online route.
posted by ook at 8:51 AM on October 31, 2012

Response by poster: Forming an LLC does not complicate your taxes[...] The $500 filing fee is cheap insurance for liability protection for life.

FWIW, I know this is accepted wisdom, but it isn't actually true (my lawyer gave me a pretty good education on this last time around). If I screw up and cause a client damages, they could still sue me personally even if I have an LLC: personal conduct, negligence, or really just about anything I could plausibly be sued for as a services provider are not protected (see here or here for example.)

And it really kinda did complicate my taxes last time, in that I had to keep separate accounts for business and personal funds, track who owned what, etc. It was enough of a hassle to maintain that at the time I felt it was worth paying the additional fees to dissolve the corp once I was no longer in need of it (in retrospect a bad decision, I suppose, but this has only come up twice in more than a dozen years of freelancing...)

Also it's $500 a year, not "for life". A small detail, but still.

Ugh. I may be talking myself out of taking this job.
posted by ook at 9:20 AM on October 31, 2012 [1 favorite]

This may be a long shot but would they be willing to contract you under a DBA name instead?
posted by hapax_legomenon at 9:24 AM on October 31, 2012

Even if you're not incorporated, you have to keep track of business expenses, etc. for your taxes, and you should have business and personal funds in separate accounts whether you're incorporated or not. So I'm not clear on why a one-person LLC would be a problem for taxes.

I'm a one-person LLC and fill out the usual single-person tax form, plus 1-2 forms that categorize business expenses and figure my self-employment tax. It's no different than the forms I filled out before I incorporated. I do my taxes with TurboTax online in a couple of hours, and during the year I track ongoing expenses, invoices, etc. with Xero, also online.

Again, I'm talking about a one-person LLC, which is all I've needed to satisfy big clients.
posted by ceiba at 10:50 AM on October 31, 2012

Ask the client if they have a vendor they use for jobs like this. They may be willing to get the contract and subcontract the work out to you for a cut. Since they're already working with the client hopefully the cut would be minimal since they have the infrastructure all setup. I used to work for a business (the vendor in this case...) that did this for clients/contractors.
posted by pwb503 at 12:57 PM on October 31, 2012

The LLC is just a red herring here. An LLC is a limited liability company, not corporation. The LLC can choose for federal tax purposes to be a sole proprietorship, corporation or partnership. What your client wants is a corporation which probably in your case means an S-corp. Whether or not your S-corp is registered as an LLC in your state is irrelevant. It is a separate decision from incorporation for federal tax purposes.

There are probably two reasons for the client wanting to deal with a corporation. First, billing is easier because they do not need to file a Form 1099 for payments to a corporation. Their accounting department is just set up to receive invoices and pay them, not deal with contractor tax forms. Second, they may have some fears about the IRS reclassifying you as an employee and back charging them for FICA taxes. These fears are largely overrated, going back to some issues in the late 90s, but some companies are overly cautious.

If you want to keep this client, you are going to have to find a job shop as an intermediary, at some percentage of revenue, or else bite the bullet and incorporate.
posted by JackFlash at 2:32 PM on October 31, 2012

Have you researched PEOs? They provide legitimacy to freelancers by assuming all of the normal HR duties that the corporation doesn't want to deal with. Read more here. Full disclosure: when I was a contract employee at GE, they required me to incorporate, or work with a PEO. It was a good experience for me.
posted by halfbuckaroo at 3:27 PM on October 31, 2012 [1 favorite]

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