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Leaving the Contracting Company for Independent Work?
Giggles of Doom asks: "I currently work for a technology contracting company (one of the ones that finds you a tech job and you work at some other company as a non-employee) and have been for the past couple years. Recently, however, I have begun to realize that for the past two years they haven't really done much for me, yet they still get a commission for every hour I work. The benefits I get from them aren't that great: non-matched 401K (that they are canceling), discounted prices on stock that has gone down for the past several years, and a few paid vacation days. I have begun looking into going independent. After all, that commission my contracting company is getting could be money I could be getting. And considering that they don't seem to be offering much in the way of benefits for that commission I don't feel obliged to have them keep on getting it. I am wondering if anyone else out there has gone through this kind of thing, leaving a contracting frim to work for themselves, and if they have any advice to give on how to get out of contracts, billing the company you're doing the work for, etc. And, biggest of all, was it worth it? Obviously it will be different with everyone and every company, but I would be interested in hearing of other peoples' experiences."
Weigh the costs of Health Care of yourself vs. your company.
This ultimately forced me to find a day job, just couldn't (and didn't) want to pay with a purchasing power of one person vs. the (relatively) cheap programs a real company offers.
Plus, if you're by yourself you'll talk yourself into the old "Well, I've been as healthy as a horse for three years" line and you'll wanna skimp, until one day you throw your back out lifting a rackmount UPS or you fall off a ladder in some godforsaken server room in the middle of the night.
Just think to yourself "Can I afford a $3000 bill if I get hosed?"
Let's look at this from the Client's point of view
You work for your contracting company
Its Client 'rents' you by the hour...
Suppose you muck up (however unlikely this may be)
Case 1: You're still working for the contractor
Client can sue a [presumably] large company
& - if it wins - have a greater chance of
their suit bringing them in big compensation
for their efforts in the courts...
Case 2: You become a one-person-contractor
Client can sue you (or your own company),
but (I'd suggest) your public liability
insurance value will be much less in $'s
(ie less to go after)
Now, if you are competent... and your Clients
know that, you should be able to break away
from your current employer... provided that
you haven't signed with the employer -and-
the Client hasn't signed with the employer
some agreement that precludes that for some time
after you leave the employer.
('don't know if that'd be legal... but you'd
sure be tied up, just as your funds would be,
if they sued you for anything like that...
And, even if they could afford it, your Clients
probably don't want the hassle of a legal battle
either; not only that, they may be depending on
the presense of -other- guys in your (present)
role, coming from the same contractor as you do;
why should they rub their vendor(s) wrongly, ie
just so you can earn more per hour and maybe
decide to leave them, to travel the world, etc?)
Actually, I like Philip Greenspun's model of
5-member companies, who offer services (in
that case, creating & maintaining database-
based web sites & the like, I understand).
Long years of experience in one or a few of
the group's areas of specialty combined with
rotating project lead's (eg changing with
the project) put them in good stead to do
what you're considering, without risking
being stretched too far, along the way...
Go have a look at the model, see if you can
find a few others with a similar vision, &
give it a go.
Good luck! (Come back & tell us how it went)
Are you sure they don't do much for you? Unless you're prepared to do business aquisition, paperwork and insurance yourself, you should think twice. Even if you think you're up to taking over these tasks, the company may be in a much better position than a lone ranger especially with regard to attracting business. This was and is the business model of contracting firms after all.
The consulting agency you work for earns it's cut by finding you work between gigs. If you can readily find new contracts without the agency, and you don't need to stay with them for immigration reasons, I suggest you make the break-out and work for yourself.
The benefits are probably not worth the reduced income unless you have an expensive/precarious medical insurance situation. An important benefit of self-employment is your ability to deduct expenses against your taxable income. Also, the experience alone is probably worth the hassle/expense.
First, I'd suggest incorporating, either as an s-corp, LLC, or c-corp in your state, for tax and liability reasons. It's not that difficult or expensive if you follow the instructions in the Nolo Press book for incorporation in your state. It should cost only a few hundred dollars, plus a state corp income tax minimum (not additional, if LLC or s-corp) of less than $1000 per year.
Second, get liability insurance. It's really cheap for contract software developers (as opposed to a product company). I found cheap liability insurance from Hartford via http://www.techinsurance.com.
Third, follow the procedures and documentation in the Nolo Press book...make stock certificates, do government filings on time, hold periodic stock holder and board meetings...for your corporation to remain legitimate if you get audited.
Fourth, set-up a company checking account and credit card. Generally, pay for things using these instruments, but you can reimburse yourself. Fund the checking account from multiple clients over the next year or two, to legitimize that you're not an employee of your client companies
Finally, bill and sign contracts with your clients using your corporation's name. You will be acting as an agent of your corporation. You can set-up QuickBooks and bill them with the generated invoices using agreed upon terms, typically Net30, which means not being paid until 30 days after submitting your invoices.
Lastly, IANAL (I am not a lawyer) and IANAA (I am not an accountant). Please use your own judgement and advice of professionals or good publishers like Nolo Press. Good wishes.
-avoelkerdude, you've got a job ... and possibly more on the way through the contracting company. some of us are still left out in the cold hoping even for that much.
You may find you're going to have to find a complete set of new clients.
Perhaps less useful to you, but here is the UK perspective:
I work in the UK and have set up a private Limited Company. My current contract is for a 3rd party via a contracting agency, who take commission etc as you describe.
In the UK, your arrangement is known as an Umberella contract, where the agency take care of employer taxes and pay you a salary.
However, I am the director of my company and can source work independently of the agency (with usual exclusions for existing client).
Is this arrangement possible in the USA, it's a good first step.
It gives you the freedom of being Independant but also leaves open the Contracting Company fallback.
Keep 6 months salary in the bank.
You'll need it to cover unexpected expenses when out of work. You will be out of work. You will be out of work more than when working for a contract house, because a contract house has full time professional sales people that are better than you and you will then be competing against.
I wouldn't worry too much about the health care. Buy some catastrophic insurance and keep that 6 months savings. Buy disability insurance. (The insurance to cover the first 6 months is the expensive stuff.)
Don't incorporate unless you must to work with particular clients. The paper work is killer.
Get an accountant that you trust.
Keep a couple customers in good standing all the time. If it is just you try to work for more than one client at once (40 hrs here, 20 there) so that if one has to drop you, you still have some cash flow.
Joe
Joe Batt Solid Design
I recently got fed up with an inefficiently-run government contracting position and decided if I wanted thinks right I was going to have to follow the proverb and do it myself. I've set up the home office about a month ago, and here are a few of the lessons/insights I got real quick.
:^D)
1.) Getting started takes a LONG time. Even if you hack at home now in your free time, you're going to need a few days to get your office right. Getting your workstation to exactly mimic the productive suite you were used to at work will take a while. Getting a website to feature past experience and show off your new wares is going to take a while too (but will pay off in the long run). Now add overhead for buying office supplies and, much more importantly, registering your company with your local gov't to reduce liability, and you'll see you're not going into business immediately. Plan for at least a month of downtime at the start (or sprinkled around your first code) for you to get the infrastructure to *start* ready to go. (aka, "MAKE SURE YOU HAVE SOME MONEY SAVED FOR FOOD AND RENT!!!"
2.) You're doing it *all* now. I'm able to finish bits of code much more quickly without the distractions of the water cooler (and intrusions into my cube), but once I'm done, now what? Marketing is no longer "the communications department's job". Nor is tech support someone else's responsibility. Nor polling the customer to see if I've hit the mark. Nor is handling the overhead if a customer is upset. All docs, all testing, all support, all "everything you didn't worry about when you were coding" is your responsibility. It's all you. Note that the side lesson is that if you can bring anyone with you -- or if you can use past contacts as subcontractors, that's a huge help while landing and when you finally land a big fish.
3.) Good luck finding the customer. Don't get the unrealistic idea that you're going to be able to spend all your time coding. As another poster pointed out, if you've already got work lined up, enjoy! But I recently spent about two and a half work-days on a 4 month job proposal which didn't get selected ("lack of previous experience" -- and I've been working in the field before this for 4 years! New companies are certainly at a disadvantage). That's time "down the drain" (though certainly I can cut and paste some of one proposal into the next), and you have to consider this as part of the cost of finding a guaranteed customer. In my "downtime" I'm writing a trialware application, but unlike contracts there's no guarantee anybody's going to want to buy. Don't underestimate how much work your current company is doing for you by finding the work.
4.) Multiply everything by three -- Time for projects, costs for supplies, costs for advertising and submitting proposals. I'm sure if you've worked more than a few years "in the real world" you've learned this one already (boy, I sure did), but it's worth keeping in mind. You're your manager now too, you know! Don't say you can name that tune in two months when it's going to take six. Having a poor experience with your first customer isn't going to help you find that second and third job.
That's the short lesson from my first month of working out of the home. It's fun, I get a ton done, all the code is done up to my personal expectations and written efficiently, but I'm still looking for my first "real" customer. Best of luck.
It's all 0s and 1s. Or it's not.
I'm also such a contractor at the moment, working at a government agency. Government at least won't contract with individuals, they only work through a very small list of approved contracting agencies (at least in this state). Most of these contracting agencies here were started by ex-employees of the government agency they contract with, so there's a definite networking system in place. Basically, I would expect many larger companies to work the same way, so I wouldn't get my hopes up trying to get personal contracts with any significant company. The most likely candidates are probably small(er) companies, which will probably also pay less, so you'll need more concurrent contracts and more hours working.
That is the question you need to answer.
Your company might be getting a cut on every hour you work...but if they find you gigs then it is worth that cut.
Unless you have solid contacts with corporations, previous employers etc. who can give you temporary gigs it is not worth the risk.
And dont believe in monster or dice to become independent.
Tat Tvam Asi
Recently, however, I have begun to realize that for the past two years they haven't really done much for me, yet they still get a commission for every hour I work.
First and foremost, learn to question your assumptions. You say "they haven't done much for me" but they still get money for your work. Thing is, you HAVE work -- you seem to think that striking out on your own would also include full-time occupation, and I can tell you right off, that's almost certainly not true. The reason so many consultants ask $75 or even $100 per hour is because they're lucky, especially now, to find 6 months of full time work per year. So, have something lined up before you quit!
Also, be careful about what you decide to take. You may have signed something with your consulting firm promising not to compete or poach customers for a year after your contract; their client (where you work) almost certainly signed a similar document promising only to hire you through them. See if any friends or family can help you out with something, anything small. That's your advantage, IMO, as a completely independent dude: you can take any job, even 40 hours over 3 weeks for 2-3 grand, that a bigger firm wouldn't consider. Capitalize on this.
Don't quit even when you line something up! Try to do whatever work it is, after hours and on weekends, or scale back your day job duties by 5-10 hours per week. But your firm is a great way to make contacts, so don't dump it until you're SURE you're ready. How will you know? If you don't know, it's not time.
That said, I would seriously recommend taking steps towards being independent. I've been independent all year now, and there have been a couple of scary months, but it's been fun and I've learned a LOT. The way I work is this: I formed a LLC in my home state of Michigan at the advice of an accountant (oh yeah - get a good one of those, too) because of the way it helps with taxes. Now, since I'm a software consultant, all of my computer equipment is bought before taxes. I get to deduct car expenses for time spent driving to work. I can start my own Keough retirement plan, and my health insurance (while minimal) is 70% tax deductible. There's too many advantages to mention. Just email me if you want to talk about it.
But definitely be careful and don't piss off any connections that might do you well later. And DON'T go behind your agency's back and ask one of their clients to illegally break the agreement -- you'll just look like a slimeball who can't deal with the real world.
is better than 75% of nothing.
Eddie Felson
All you need to do is find yourself a Bert Gordon.
Good point. I believe that goes to 100% for 2003 and beyond.
Think 1200 to 1600 hours X Billing Rate for Revenue
Think the following for expenses:
-Lawyer
-Accountant
-Health Insurance
-Disability Insurance (as important as health insurance)
-Life Insurance (if you are married or have dependents only)
-Business Liability Insurance
-E&O Insurance (maybe)
-Cell Phone
-Voice Mail/Fax (second line or something like onebox.com)
-DNS hosting, shell account, email (think easydns.com and something like imhosted.com or threeh.com)
-internet connection (DSL or Cable Modem, pro rated for non business use)
-marketing goodies (maybe some pens, mugs, or shirts for yourself or others)
-Logo Design/ Identity (think www.1800mylogo.com)
-Education costs (your yearly Usenix or whatever conference)
-Professional Group Membership
-Reference materials, magazines and books
-American Express Card yearly fee
-Hardware and software costs
-biz checking account and business checks
You pay a self-employment tax of 15.3%
You can put 15% of you Net into a SEP-IRA (think Vanguard or TIAA-CREF low exepense, no-load mutual funds)
If a Sole Proprietor or Sole Proprietor LLC you basically pay personal income tax on: (revenue - expenses - SEPIRA).
You need to make quarterly estimated tax payments.
Get an Accountant to help you with a system. You will want a notebook for a startup expense log, an asset log, and expense/revenue notebook. If you don't understand things like depreciation, you will need to find that out. Most states have some free legal programs for small startups.
Also, you accountant can help with travel re-imbursement, home office deductions, etc.
Note: Everything is more complicated then I have mentioned.
Check out these 2 books:
Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants by Stephen Fishman
Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business by Linda Pinson
An LLC does not have a board of directors or stock. AN LLC has a membership agreement (it is like a partnership agreement). And if it is a one person, or Sole Propieto LLC, you don't need a membship agreement eigther. Your state may or may not make it real easy to create and LLC. My state (Wisconsin) lets you set up one on-line easily and cheaply.
If not, there are some self-service consutling companies out there such as FreeAgent and ZeroChaos. They do the billing, taxes, 401(k), insurance, direct-deposit, etc. You pay a monthly fee (~$300) plus insurance premiums.
But when your contract is over, they don't find you a new one. And they don't pay you until your client pays them, so be prepared to get paid irregularly.
I have a book written by Janet Ruhl, published by John Wiley and Sons titled "The Computer Consultant's Guide" subtitled Real-Life Stratagies for Building a Successful COnsulting Career. It gives a lot of tips and pointers on doing your own contract / consulting work. It goes through all the business and legal issues you might face. It's ISBN 0-471-17649-4
I agree with Mactari's general points. I would also add that it's easier to get a business going on the side first and then when you have some cash flow, then make the jump to full time work. Theoretically you could make your company, work on the weekends, find contracts, and still keep your day job - just hire some independents to do work for you. When you have enough and less worry, you can jump too.
I'm not saying don't do it, or that contracting companies are saints, but you are getting something for that comission.
-Peter
I live in Virginia, a Right To Work state, and such so-called "non-compete" contracts are considered "restraint of trade".
You can sign them, but they are merely scare tactics to scare a contractor from defecting. In reality they are unforceable.
I have never refused signing one, however I have pointed out that they are unenforcable AS I have signed them. In reality by not signing one you would be saving yourself, and your company, legal costs (That they would ultimately lose in a Right-To-Work state anyway.)
You may be doing both yourself and an employer a favor by refusing to sign one of these. Though they may not view it that way.
-Clio
Karma: Bad (mostly from not giving a fuck)
Blog: http://clintjcl.wordpress.com
I kind of avoided this whole issue. Self-employment can be a real hassle.
I found a job, then found a firm that would handle my contract billing and pay me W2. That worked out great. I billed at one rate, they kept 14% (and paid their part of the taxes out of it) and I got the remainder W2. I added medical for $1/hour. I would have had to give up a little more percent if I hadn't gotten the job. This worked out fine for many years.
Other contract firms usually took a minimum of 30% and up for the privilege of employment through them.
I've been freelancing for six years now. I agree with many of the things others have said, especially about having a big savings cushion. But here's my big piece of advice: Getting work will be much harder than you think.
Once you go own your own, you go from being a technical person to a marketing person. Network relentlessly. Join user groups. Collect recommendations. Get and stay in touch with old colleagues. Write articles. Schedule plenty of time for keeping up on the latest skills and the latest buzzwords.
My tip: start out by getting part-time work. Don't quit your day job until you have so much outside work that you can't stand it anymore.
Also, I'd recommend that you read "The Computer Consultant's Handbook"; and Weinberg's "The Secrets of Consulting." The first one's a little old and the second one is focused more on consultants than contractors, but you will find both helpful.
Working for CDI they markup 48% and no medical or 401k, but they do have many contacts.
Excellent summary.
I am an independent contractor, and I'd add a suggestion to use QuickBooks, or other accounting package, instead of the notebook. If you can get a bank account or credit card that will let you download the info to QuickBooks, then keeping track of business expenses is almost a no-brainer. In addition, most accountants can deal with Quickbooks files.
That said, my accountant is simply too expensive for me ($1000/yr), so this year I am doing the taxes and forms myself. I would NOT recommend this for the first year though.
I am an independent consultant, and one of the main reasons I decided to freelance was a desire to find out more about business. I was really tired of being spoon-fed what the business and marketing people thought I should hear. In short, I wanted to hack the IT world.
No doubt many consultants feel the same.
Frankly, it's a lousy time to be a freelancer; rates are way down, and work is hard to find. But if your motivation is really to explore and discover, then go for it!