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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."
This is a limited time offer!
Act now to reserve this special deal.
Exclusive priority for those that act now!
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.
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.
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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.
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
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
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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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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.
That may be true regardless of his incorporation status. Doing consulting work makes you a business in the eys of the IRS, whether you like it or not. The down side is you have to file more than just a 1040; the upside is you get to deduct certain busines expenses pre-tax.
You may also have to file quarterly tax returns, even if you don't incorporate.
The main reasons for incorporation are: limiting liabiity so you don't lose your house/car/stereo in a business-related lawsuit, and arranging your finances to reduce taxes.
Incoporating also helps if you have real employees and want to set up benefits programs. Certain states do not allow one-person businesses to incorporate, so you may need to appoint your spouse/partner/firend as a corporate officer.
I'm glad this question came up, since I'm undecided about forming a corporation or not; it isn't clear to me what the befits are for a single-person consultanting developer.
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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.
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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