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."

Comments

definately incorporate

[b-side.org]

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.

Recently asked here and answered

[uslinux.net]

I believe a very similar question was recently asked and answered here on /. back on December 19.

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.

Incorporating

[Lando]

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

Re:Incorporating

[rw2]

I've been incorporated for 5 years now, so I wanted to give my view of a couple things:

Pros of Incorporation:
Reduced Tax burden through use of write-offs

You can write off many things even if you don't incorporate. I talked with my accountant about this some time back, so I don't remember all the details, but it turned out to be something like 50-60% of what I would have spent I could have been writing off anyway (assuming you itemize). So, talk with your accountant about this before you make a decision (oh, and you need an accountant).

Cons of Incorporation:
Increased time overhead to keep books, separate accounts, licenses etc

This you should definitely do even if you keep a real job. Even if you don't have seperate accounts, you want to keep track of business expenditures in order to itemize those you can and talk to your boss and tell him why he should subsidize your expenses.

"C" Corp taxed twice

This is bit of a red herring. I've always run a C because you have different retirement planning options (i.e. I can put away nearly twice as much under my C corps plan as under others). In return for that, my C corp pays a handsome bonus at the end of every year in order to avoid profits (the profits are what the tax is on).

I agree with the vast majority of what you've said though. It's wise to be careful and make sure you are comparing apples to apples. A $50/hr w-2 position with health insurance and other benefits can be a much better deal than a $60/hr contract position where you must take care of all that yourself.

On the other hand, if you have crummy insurance, a car that you can sell to the company, can save a lot for retirement (e.g. you're still living on $30/hr even though your salary has increased), then $50/hr as a contract may still be worth considering.

Let me retirate one thing. Get an accountant.

I spend about a thousand a year on mine. He does my quarterly reports (which I could easily do myself, but I like having him checking my work more than once a year) and my year end filings. Because of this, he is familar with my company, plans and needs when I call him for advice on specific issues (e.g. leasing v buying vehicles).

Make sure you get an accountant.

Go talk to someone who has a clue.

[fwc]

I'm sorry, but I don't think I've ever seen a ask slashdot with such a wide variety of what I believe to be wrong answers, and I suspect some of the things I say won't probably be applicable to everyone else because the laws differ from state to state.

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.