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To Inc. or Not to Inc.?
rikkards asks: "I have
just started as a contractor for a government office and am doing this
through a recruiter. Said recruiter is saying I may want to
incorporate myself. I am wondering if it is really a good thing. I am
not sure whether or not I want to stay as a contractor for the rest of
my career. The money is decent coin (for today but maybe not 2 years
ago). Does anyone have any pros/cons on doing this? If I do it soon
the recruiter will do it for me."
I've just spent the afternoon watching Rollerball, so I'm oddly biased, and anyways this is a First Post attempt so I can't really give a coherent/sensible answer. ;)
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If I do it soon the recruiter will do it for me.
Sounds like your recruiter used to do infomercials. Perhaps incorperating is a good idea in some cases but you should run-don't-walk away from this "special offer"
If voting were effective, it would be illegal by now.
I too am running a consulting business as a partnership, but I've heard that incorporating could pay off in the long run. I haven't done a whole lot of research, but I think it really depends on what state you incorporate in. Some states may require an attorney and quite a bit of money.
1. Bad signature
2. ?????
3. Profit
You'll save $$$$$ on your taxes. Get an accountant, save all your receipts, and you can write off just about everything you spend money on. Car, part of your rent, books, some meals, etc, etc.
If someone else is paying for it, there's really no downside. If you don't want to take a job as a rep of your company, you don't have to.
Indie rock lives! b-side!
Read the answers to that. Incorporation is a lot of extra work which probably won't net you much right now. Whether or not it will help you in the future will depend on whether you want to start your own company. If they recruiter will pay you the same, then you definitely DON'T want to incorporate, because YOU will be responsible for things like the other 1/2 of social security (6.75%), unemployment taxes, etc.
Again, read, and reread the comments from the article above.
Do you mind being responsible for a corp entity, taxes, getting your own insurances, and etc? If you don't mind doing legwork like that in your evenings then go for it, it's easy enough to dissolve the company when your done with it.
I dunno about the not so good cash 2 years ago comment, if anything your gonna find that now is more of a slump then 2 years ago at this particular point in time with everyone bitching about rates in this little recession and all. Anyway you look at it though, you'll make a bigger slice of the pie not having the bloodsucking recruiters doing your W2 for you and taking 30%+.
I am seriously thinking of doing it again after a year away from contracting and being an employee recently. Best part is if you are done with your contract you can go on vacation for the summer.
Some freelancers decide to go this route. The Washington Post has an excellent article on whether you should incorporate as a freelance contractor, including the tax ramifications of incorporating vs. working for yourself.
I'm assuming the recruiter is suggesting that you create a corporation that hires yourself that offers consulting services.
Pros:
Limited liability - If you mess up, they can only sue your corporation. Think of it as a sheild.
Another pro, since the government is hiring a company (yours) and not a person, if you screw up, your boss can complain only to the company that hired you.
From the Bastard Operator From Hell
"So we're screwed whatever we do?" The Boss sighs.
"Yep - that's why it's called a disaster. We only have personal recovery plans here."
"Which are?"
"Send each other's contracting companies bust by suing each other for negligence before this company can get to us. Then hide in the Third World (Liverpool) till the noise dies down, and get a new contract with another company."
The biggest con is expense, a document of incorporation can cost upwards of $10,000
The other con would be taxes, as the corporation's taxes must be filed seperatly from yours.
Hope that helps
Basically, an LLC gives you the liability advantages of a corporation, but they have the much simpler tax ramifications of a partnership. Moreover, they are mcuh simpler to create than a (properly constructed) corporation.
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I can't give a definate answer to this question, but I will throw in my .02 for what it's worth.
Pros of Incorporation:
Liability Protection
Reduced Tax burden through use of write-offs
Cons of Incorporation:
Increased time overhead to keep books, separate accounts, licenses etc
"C" Corp taxed twice
The only reason That I think you might want to incorporate is to save tax money. As such speaking with an accountant will be your best bet.
The company you work for may want to shift the burden of paper work onto you, which will save them money. You will have to spend a couple of hours a month updating your records, play you will have to spend more money on Social Security 7.5%, provide your own health insurance, etc. Unless they are paying an extra 30% over being a W2 employee I don't think it would be worth it.
Liability Protection:
Incorporation is an excellent way of separating your own finances and liablities from that of the company. However, you will likely not receive full protection if you are the only employee of the company.
Separation of Funds:
Never ever spend anything on personal items from the corporate accounts. Doing so may open you to any company liability. The income and equipment that is owned by the company are not for your personal use.
If for any reason you have to have the company declare bankrupcy(sp?) your personal finances will not be damaged. However, during the first 2 years of a business most creditors will require that you co-sign any loans the company might receive. I doubt this applies to you since your basically working for someone else and have no expenses.
Reduced Taxes:
A LLC or "S" corp be used to write off expenses and save "income" since you can spend write off purchases relating to the corporation. Medical insurance becomes a little easier pay for since you can allocate pre-tax dollars or have corporate benefits which pay full medical. Again business expense pre-tax write-off.
Lando
/* TODO: Spawn child process, interest child in technology, have child write a new sig */
Actually, his recruiter is doing him a favor by suggesting this as a possible alternative. He has the potential to save a lot of money by going this route as he will be able to buy things related to his job with pre-tax money.
It's not a scam in any way, shape or form.
Go with a simple sole proprietorship. Use your own name like "Joe Smith's Services" and you'll save about $150 and 2 hours spent getting a DBA. Lease what you can, like computers, and it's easy to deduct that cost. Don't build up any assests in the company and you don't have to deal with depreciation. Your taxes are easy enough that you can do them yourself.
Don't forget health insurance. See if your state has an open enrollment period for the self-employed. Get into a plan then, even if you're on COBRA at the time.
If you do incorporate, beware of that friendly recruiter. There are a ton of places that will file everything for you for as low as $150. If the recruiter wants $1,000 or more, he's ripping you off.
Whether you incorporate or not is a complex decision that requires a back-and-forth conversation with someone knowledgable about accounting principles and tax laws in your area. It's not something you'll get a lot of good information about on Slashdot.
Whether you incorporate and what type of corporation you use will depend mainly on your planned expenses, how much work you are planning to do under the corp in a given period, and laws in your area relating to taxes and liability.
Go find an accountant.
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Perhaps, the answer for your situation would be Sole Proprietorship. The chief appeal of sole proprietorships is that they are simple, simple, simple. Boy, are they simple. More can be gleamed on this subject here and here.
Just a few examples of their simplicity:
Simplicity in taxation: Sole proprietorships have the simplest form of tax filing. You don't have to file a separate return.
Simplicity in formation: You don't have to pay any fees to the IRS or the federal government for starting your business.
Simplicity in employment: As a sole proprietor, you don't have to worry about paying employment or unemployment taxes for yourself.
Simplicity in home-office deductions: If you have a dedicated space that you use regularly and exclusively as your place of business, you may qualify for a home-office deduction.
Simplicity in retirement plans: As a sole proprietor, you can put money into a Simplified Employee Pension (SEP), a SIMPLE plan, a Keogh or an Individual Retirement Account.
Of course, this simplicity does come at a price - a complete lack of personal liability protection. However, in a scenario such as the one described above, that may not be a primary concern.
Alternatively, there are several other options that are present for individuals wishing to start their own legal entity. For example, an entrepreneur with a profitable business who wants to set up a fully deductible health benefits plan will want to know more about a C Corporation. A sole proprietor looking for some liability protection with a minimum of additional paperwork will probably consider a Limited Liability Corporation (LLC). Anyone who wants to bring in partners or outside investors is going to have to look at a partnership or corporate structure. The self-employment tax (15.3% on the first $76,200 of net income, compared to the 7.65% you pay as an employee) drives sole proprietors nuts, even with the partial offset of being able to take an income deduction for half of the tax paid.
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LLC stands for limited liability company, not corporation. This seems to be a pretty common symantic error. A corporation is limited in liability by definition. You are correct on the tax ramifications however. Lots of good LLC taxation info can be found here.
If it ain't a Model M, it's a piece of crap.
A few more notes in addition to all that has been said.
Most times an offer to work 1099 or corp to corp means that you get paid when they get paid. So your recruiting firm gets paid net 30, you get paid 10 business days after that. Think about it--you start working January 1, they invoice the govt for your the month of January, they collect the money HOPEFULLY by February 28th. You get paid on or around March 10th. Or, if the government is unhappy, which is known to happen, they can withhold payment, which can really out you in a cash cruch.
By comparison, when you work as a W-2 employee then in most states, (or least NY,MD,VA,DC as far as I know), as an employee your time must get paid for regardless of when or if the recruiting firm ever gets paid by the goverment. Also, on a W-2 you generally get paid on a regular schedule, like bi-weekly or something. Thats the pro for W-2.
The pro to corp2corp is, usually more money, tax benefits, and also the yadda yadda yadda. My advice, try to get W-2 for about 10-15% less hourly than corp to corp. Failing that, make sure and build into your hourly rate enough money to pay an accountant and an attourney. Good luck.
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Depending on the agreement you signed with the recruiter who got you the job, a pass-through agency may be a better bet than incorporating. Pass-throughs act as your employer for tax, invoicing and collections purposes. But they don't take as much as regular agencies do because you have to find your own projects. Like a partner in a law firm, you have the responsibility of bringing in business and controlling expenses in your "practice".
Benefits:
You can deduct the same kinds of expenses.
They bill the customer and collect the money.
They deduct for pension, healthcare and taxes.
At year end, taxes are as simple as a W-2.
If you're buying a house or car, you look like an employee with continuous work history, instead of having periods of unemployment between gigs.
Downsides:
They charge 5% off the top in addition to withholding taxes.
You have to get your own gigs, they don't find projects for you.
One example is Professional Association of Contract Employees (P.A.C.E.). There is some good info on their site about using pass-through agencies. Also check their sister site, the Contract Employees Handbook for info on dealing with recruiters and the games they play.
The first thing *ANYONE* should do is to talk to people who know. Read the IRS documentation. Get the appropriate forms and iformation from your local State Government (most likely your equivalent of The SEcretary of State, The Department of Revenue or Taxation, and the Department of Commerce.). Talk to an accountant and lawyer you feel you can trust. Talk to other friends who have started and ran succesful businesses.
What we are really talking about is starting a business. This isn't something to take lightly. There are hidden pitfalls and taxes and licenses and expenses and a hundred other things most people don't realize happen when you start a business. You have to get a business license. Usually your personal property which you use in a business starts being taxed locally as property. You have oodles of forms to fill out (or pay someone to fill out). You usually have to start paying unemployment insurance. You might have to start paying for worker's compensation on yourself. If you do the wrong thing on your taxes, the irs might get suspicious and audit you. And on and on and on.
That said, I run a corporation. I am the sole employee, other than my wife. Is it worth it to me? Yep. Is it a pain sometimes? Yep.
In Montana, where I live, there's a form of corporation called the "Close Corporation". Basically with under a certain number of shareholders you basically run the corporation like a sole proprietorship. Combine that with the Small Corporation regs and you end up with a Subchapter-S Close Corporation which is essentially taxed as a partnership, which means you are taxed for the Corporate Profits. There is no "double taxation" which really refers to when a normal "C" corp earns it it is taxed and when they pay dividends the dividend recipients get taxed. There are other differences. And there are a hundred different strategies and options which vary from state to state to state. I can't tell you what is best for you.
One thing to think about. Someone has to pay the appropriate taxes (Social Security and Medicare and possibly other local and federal taxes). If you are a corporation and they pay the corporation, the corporation pays them when it pays you. If you are a sole proprietor you pay them when you pay Self Employment Tax (Form SE). If they pay you as a W-2, then you are an employee and they are paying them. And, in case we didn't make it clear, there are both employer and employee portions of the taxes - you usually never see the employer part, but I can assure you they hurt to pay. If they are saying "We'll pay you $50/hr no matter if it is W2 (employee) or 1099 (contractor)", take the W-2 and don't even bother with the contractor side. If they're paying you 10% more on the contractor side, STILL take the W-2. If they're paying you more than that talk to an accountant.
IANAL BUT: I want to touch back on the corporation side. I personally wouldn't start a business without the liability protection of a corporation. If you do something intentially wrong, it probably won't protect you. However, if you are diligent in keeping the roles separate and make sure you have the assets you care about (The house and the car for instance) in your name, then you have some personal protection against fiscal liability. Let me give you a for instance. Let's say you have credit strictly in your company's name (and you have been very careful not to sign any personal guarantees), and you buy a truckload of computers for a client who subsequently takes the computers and doesn't pay you or goes bankrupt. Now the corporation is on the hook to pay for a truckload of computers which it neither has nor has the funds to pay for. As a result, the corporation goes bankrupt - and as a general rule, you go unscathed. Yes, there are ways for people to get around the corporate protection, but as long as you didn't do anything wrong other than trusting the bankrupt client generally the company you bought the stuff from can't come after you. Again, IANAL, and you definately will want to talk to one.
Let me reiterate - Talk to people and understand EXACTLY what you are in for. I realize that is probably what you are doing here, but remember that things vary from locality to locality.
One more thing. Other than lawyer fees it costs around $70 in my state to become incorporated for companies authorized for less than 50,000 shares. Someone else through out thousands of dollars. That is hogwash. However, the second you do this, it does trigger a whole bunch of other expenses, probably nowhere near thousands of dollars, but again different from place to place. Generally getting stuff set up is inexpensive, but you MUST understand what you are getting yourself into.
Incorporating has it's benefits, but also it's drawbacks (paperwork!! scheduled taxes throughtout the year, etc).
You should seriously look into an LLC. Depending on the state that you are in, it may give you exact/similar liability protection similar to what incorporating would give you.
And LLC income/expenses are easy to do - just add your income from your LLC to your taxes, and deduct the expenses. Turbotax handles it all real nice, but it's not hard to do if you keep your receipts and documentation.
You could try contacting your state bar association and see if they have any pamphlets/information about corporations/llc's. Also, contact your secretary of state. Some have Small Business Development Centers that will give you a starting pack to find out what you'd need to do to from a corp or LLC, and what VENDORS LICENSES you will need to obtain. Some will even give you free counseling on your options and such.
Also, there's http://www.sbaonline.sba.gov/ and irs.gov
Good luck. I just went through this a few months ago forming my own company.
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The question really cannot be answered without specific advice from professionals in your jurisdiction, with your circumstances and revenue projections.
In general, there is usually a "ballpark" income level where incorporation starts to become attractive over a proprietorship (an unincorporated business).
But, this is so dependant on your local tax laws, your personal circumstances, and future prospects that a definitive answer really cannot be found in a forum like this.
Do your homework on the 'net, but this is really a question that won't be answered in full in a forum.
I've been working as a freelance consultant though my corporation since 1997. Here's my take on it:
* In some situations, incorporating will save you money. A pretty clear one is if you have a family and your spouse doesn't work. 100% of your health care costs are deductible if you have a C corp. The savings from that alone should offset the expense of an accountant, insurance, the fee to incorporate, etc.
* Rates are generally better if you are a 1099 rather than a W-2
* It's often easier to go direct (bill the client directly without going through an agency) if you're incorporated. It's strong protection against you being classified as an employee by the IRS.
But if what you want is simplicity and peace of mind, be a W-2 and pay someone a percentage to have all the worries.
If you're considering incorporating or forming an LLC, I'd recommend checking out some Nolo Books; they're the best references I've read.
There is a book dedicated to answering this question... it's called Inc Yourself, and it's been useful to me.
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