Shell Companies for Contractors?

dubl-u asks: "What do my fellow freelancers feel about the various shell companies out there? I've got a chunk of work coming up at a place with an especially persnickety contracts department, and I'll probably need to go through a third-party shell company. I used one a couple of years back and they were ok, but there are a lot of them out there, and I'd love to hear about real-world experiences before I sign up. For those unfamiliar with this part of the business, it goes like this: I find my own work; the shell company hires me as an 'employee' and handles my billing and tax withholding for me. Some also 'provide' things like health insurance and 401k plans, although I have to pay for it. You can think of it as outsourcing a lot of the paperwork of being a freelancer. Some outfits, large companies especially, demand this sort of thing."

Comments

WBE/MBE/DBE status?

[gregwbrooks]

Just curious: Do any of these companies offer the added benefit of being MBE/WBE/DBE certified? I do a lot of public-sector work, where there are typically set-asides for disadvantaged, minority-owned or woman-owned busiensses.

If they could offer inclusion into one of those categories, it would be a pretty big advantage in bidding on some projects.

Re:WBE/MBE/DBE status?

[Anonymous Coward]

One of the best reasons I have for not taking on employees formally is laws favouring people on the basis of colour or gender. As someone colo[u]r- and race-blind, I refuse to have to abide by discriminatory laws.

If a black lesbian Muslim cripple can do the job, she'll get it. If you're a fit Aryan male who can do the job better, you'll get the job instead. Anything else is irrational.

Re:WBE/MBE/DBE status?

[mercenaryCoder]

Absolutely. The company I "work" for decided to go this route. The founders' wives were MBA's so they put the business in their names -- walla.

Re:WBE/MBE/DBE status?

[orangesquid]

But don't forget doing the job is only half the work. It's really important in most jobs to be a people person, to be able to communicate well, respect your boss's opinion, be open to your underlings' opinions, prioritize well, manage your time effectively, and all the other things that companies are always talking about. Now, you may call these "doing the job", but many computer programmers probably think that being a good programmer is about all they need. Your black lesbian Muslim cripple may bring valuable things to the workplace that a fit Aryan male would not provide. If you're only concerned about individual efficiency, hire the faster worker, but if you're interested in overall company productivity, a healthy work environment, and company morale, you might have to turn down the better programmer on occasion.

Just my two Euros.

Spent most of my carrerr doing this

[mpechner]

If you can get a 1099 out of the "shell", do that. One of the advantages of being a 1099 contractor is deducting that new laoptop. Almost not worth the deduction as a w-2 employee.

If you are bring in the contract, and have the rate set, they should be getting no more than 25%. Remember, as a w-2, they have the costs of social security, worker comp, libabilty and their staff.

On a 1099, no more than 10%.

If you feel you will be getting more of these, put together a LLC if you have one other friend also contracting. Two employee make for a group health plan under California law.

Do not let your health insirance lapse for more than 59 days. Otherwise under federal law the health insurance companies can absolutely screw you. Can we all say Pre-existing Conditions.

I can write several pages on this. Anybody want advice, read all the postings and contact me.

I've been a indepentant contractor, gone through agancies, been a salaried employee of several body shops, worked for beltway bandits. 21 years of this.

Bottom line, do a 1099 if you can. Do not under any circumstance let your health insurance lapse for more than 59 days.

Re:Spent most of my carrerr doing this

[count3r]

If you feel you will be getting more of these, put together a LLC if you have one other friend also contracting. Two employee make for a group health plan under California law.

Actually, many large companies (including mine) are even more restrictive-- not only do they require a contractor to work for a shell company, the shell company needs to be on a (usually short) list of approved vendors.

Forming your own shell doesn't solve this...

Re:Spent most of my carrerr doing this

[mpechner]

Yes, but if you have your own shell, you can get a 1099 from the shell. Again, makes this trips to Fry's or buying tech books deductable.

Re:Spent most of my carrerr doing this

[dubl-u]

On a 1099, no more than 10%.

The ones I've looked closely at, ZeroChaos.com, MyBizOffice.com, and PACE all charge less than that. ZeroChaos is very vague about their fees, but they quoted me $300 per month per active client. MyBizOffice charges 4% for the first $125k in billings and 1.5% after that. And PACE charges 5%.

I don't think any of them will do a 1099; they all seem to do W2s, and of course all of the taxes come out of my share. At least one of them has an intriguing lease-back program, where I buy the equipment I want, lease it to the shell company, and then they deduct the leasing fees from my inccome. I believe this is a dodge to get the same tax benefits for capital goods as working on a 1099.

Re:Spent most of my carrerr doing this

[iwrasahp]

A very good point. It's not clear from the original post if the opportunity requires going through 1) a 'shell company' (i.e a corporate entity) which provides a level of legal protection etc. to the client or 2) an 'approved vendor' (often referred to as a 'contract house' or 'body shop') and is the preferred, and sometimes only, way to provide services (for which you will be paid) to the client.

If the answer is 1, your options are many up to and including setting up your own company. If you are not interested in the hassle of paperwork and administration, there are companies out there ('shell companies') that will allow you to offload all of this for a fee, depending on what services and features you require.

If the answer is 2, your options are more limited as you are essentially limited to the client's list of approved vendors which can be anywhere from a few to dozens. In this scenario, short of forming a meaningful relationship with the company that you contract through, go for the best financial deal you can get since the engagement will last only as long as you are able to balance the interests of yourself, the company you bill through, and the client.

In either scenario, be cautious entering into a salaried vs. an hourly or fixed price agreement as you are providing everything (a customer in need of a solution and the solution) that matters in this transaction.

Re:Spent most of my carrerr doing this

[Anonymous Coward]

I agree that there are many benefits to going 1099, but people should be aware of the burdens that this entails. Beyond the obvious things like health care etc, you have to be very, very conscientious about filling out your tax forms and sending your regular tax payments to the IRS. When you go 1099 the burden of tax withholding falls on you.

<BR>
For many people, this isn't a big deal - they hire a cheap accountant to do it for them, or have the right kind of personality to do regular paperwork and get that check to the taxman on a regular basis. But if you fill out your IRS paperwork incorrectly, or fall behind in your regular tax payments, the IRS is going to fall on you like a ton of bricks.<BR>
<BR>
If you save your receipts, feel comfortable with the 1099 paperwork, and feel that you'll make those regular deducations, then 1099 is the best way to get the most money. But if you're shakey on any of this, the convenience of going W2 through a shell is tremendous. Yes, the shell will take a bigger cut, but you're not risking the IRS knocking on your door.
<BR>
Keep in mind - in general, the IRS is must more fastidious about monitoring deducations than doing regular tax return audits. If you fall beind or screw up 1099, they will react quickly and the penalities can be very, very big.

Just create your own S-Corp

[cs668]

In most states it is easy to incorporate. Maybe $150 if you do the paperwork yourself.

Then they are doing business with a corporation and you might be saved the cost of dealing with the shell company.

Re:Just create your own S-Corp

[digerata]

I almost fell into the scam of those companies that will 'do all of the paperwork for you' for between 300-500 dollars depending on where you are at. Then I looked around...

In MI you can create an LLC for a grand total of 60 bucks. 10 dollars for the county DBA (doing business as) and 50 bucks to register the paperwork with state. You don't even need the DBA later on, you could just skip that.

Piece of pie.

Re:Just create your own S-Corp

[John Hasler]

> In MI you can create an LLC for a grand total of
> 60 bucks.

Some companies will not contract with a corporation that has not existed for some minimum number of years. Others require proof that the corporation have a minimum number of employees and/or a minimum annual revenue.

Re:Just create your own S-Corp

[weave]

I would think you would also need to get liability coverage. What if you get sued?

Re:Just create your own S-Corp

[Anonymous Coward]

In most states it is easy to incorporate. Maybe $150 if you do the paperwork yourself.

Less easy to do yourself is to dis-incorporate. It cost me about $1,300 in laywer and accountant fees. Though I was glad to be spared the paperwork and research.

Re:Just create your own S-Corp

[Anonymous Coward]

> I almost fell into the scam of those companies that will 'do all of the paperwork

It's not a scam in most states. In the three I've incorporated in, they required a lawyer to file the paperwork. The "kits" are cheaper than hiring a lawyer. The three I dealt with had their lawyers file the paperwork. In those three states and one other I know of, the paperwork has to be filed in person in the state's Secretary of States office. Again, the kits saved me money. It saved me from either driving to the capital to hire a lawyer or paying a lawyer to drive($$$!) to file the paperwork. I know many IT guys, especially ones that are into open source, are distrustful of letting someone else do something, but in this case, it is cheaper and easier. Learn how to delegate.

Re:Just create your own S-Corp

[cs668]

Depends on the State.

Sorry it cost you.

As long as

[da_Den_man]

Your shell company doesn't do what mine does and takes HALF of the contract amount (total is $65....they get HALF to have me work where I do) you should be fine

I know I am not the only one in this boat that doesn't get any of the benefits of a contract yet supports this company just so I can pay my bills. It sucks, as they make as much as I do just because I show up to work.

Let the vultures start working

[MerlynEmrys67]

Many large companies go through "Approved" vendors to "hire" contractors. Basically if you want to contract to one of these companies you have to go through a limited number of body shops. The disadvantage is these companies take a HUGE cut, sometimes as high as 40%. Now realize that there are some overheads, 6.5% social security, 1.? % medicare... But somehow adding it up to 40%.

Now if you are able to 1099 to the company directly (so you get the WHOLE check) you are well off, companies that are used to paying $90 an hour so you can make 40/hr... if you get the whole check yourself, that can be good money

Re:Let the vultures start working

[dubl-u]

Yep! The reason I want to use a shell company is that some companies don't like doing 1099s directly. Also, having somebody else take care of billing, medical, dental, and 401k is appealing to me; I hate that admin stuff, so paying 4-5% of my gross to have it all go away seems reasonable to me.

Re:Let the vultures start working

[O'Limpy]

here in Sydney, Australia, I've seen the reaction to this trend. Large employers didn't like the idea of body-shops getting rich, so they've imposed their own terms on prefered suppliers. In 2001, we have signed a trilateral contract, where each of the three parties was aware how much the other two are paying or getting( the employer, the body shop and myself). The body shop took 20%, still outrageous, considering that it was pure commission, without any benefit to me.

Now I've found another contract elsewhere, but the same body shop happens to be the prefered supplier again. They still take only 20% officially, but they managed to pinch another 3% off my back on a few obscure taxes.

The change in terms is due to the "supply and demand" rule. Let's just hope the IT job market picks up, hopefully sooner than later.

Did anyone else..

[mivok]

see 'shell company' and start formulating a reply along the lines of.. 'yeah, theres plenty, but few will let you run eggdrops/bnc servers.. etc..etc..'?

Re:Did anyone else..

[SimJockey]

Heh, in my case I was thinking more like "They have some interesting refining technology, but their upstream work in places like Nigeria is a bit sketchy." (Shell Oil, who I have in fact contracted for in the past.)

i think you're confusing shell and contractor

[Anonymous Coward]

this guy is looking to have tax/legal services taken care of for his own business.

Holy cow.

[Anonymous Coward]

I guess you had to quit school early to start work.
Or maybe you were dropped on your head as a child.

Shit, when I read posts like yours I really do not feel bad about my chances of getting a job in this economy.

wow, dude. Just wow.

Kelly Technical Services

[MarkusQ]

I did this w. Kelly Technical Services a few years back. I had the deal all worked out with the client company, and then contacted a number of shell companies to negotiate who I'd go through. Except for a brief period when they had an idiot working in the office (a problem which they quickly corrcted) they were quite reasonable.

A friend of mine used (IIRC) "T. H. Yoh" and liked them as well.

The market has changed a lot in the last five years, so YMMV.

-- MarkusQ

Re:Kelly Technical Services

[meme_police]

I'm with YOH, who are fine but my previous small, local company actually paid for our health insurance. At YOH I have to pay the full premium. OTOH YOH is nice for administration reasons, on-line timesheet, YOH contact on-site, blah blah blah. Obviously I'd rather be staff instead, though.

Fairly common in UK

[larien]

Here, there are a number of contractor which work through an agency. The contractor fills in a time sheet for hours worked & gets it signed by the company being worked for. The agency pays the worker through normal procedures (including deducting tax at source) and bills the company for the pay + a "management fee"; I think mine charges the company 3% or thereabouts.

Some will also provide pensions/holiday pay, but I've been happy working with the concept that I get paid for what I work. It makes for some lean times (e.g. Christmas) and some gluts (I've done a 7 day week before) but effectively balances out.

It's a simple way of working, as you count as a normal employee in most ways which simplifies tax.

What about contractors in India ?

[jeanluc.bonnafoux]

Why should an american company hire an american contractor. They can have the same kind of skills for far less money hiring a contractor in India...

Re:What about contractors in India ?

[dubl-u]

Why should an american company hire an american contractor. They can have the same kind of skills for far less money hiring a contractor in India...

There are a lot of reasons. Most of them boil down to the advantages of physical presence, which provides high-bandwidth, low-latency communication. Others are primarily social.

There are times when outsourcing can make sense. If you have a clear spec and people can implement it properly without asking any questions, then sending the work off can work. But this contract includes analysis, design, construction, and training in a short-cycle iterative process. Outsourcing that to another timezone is impossible.

Hint to those worried about their jobs: standard software practices don't take proper advantage of physical colocation. Adopt a process like Extreme Programming, which does, and you'll have a business advantage that can't be matched through outsourcing to Outer Slobovia.

If you can get out of "contractor"...

[shoppa]

The shell company is in all likelihood only necessary because you're selling your services as that of a contractor.

If you turn the tables and sell a "product" instead, you will avoid the contractor's ball of wax but arrive at a different set of problems instead. You won't get paid until the product is delivered (probably 30+ days after the product is delivered - purchasing departments sometimes specialize in pushing every term to its limit) and you will have a different set of purchasing hurdles to overcome. I happen to think that in many cases the "selling a product" road is superior - especially for a project you know can do in firm fixed price/firm fixed terms - but look closely at the disadvantages before jumping. Tim.

Big push for this

[ubeans]

In Montreal there is currently a big push from
the big "shell" companies to move all independent
contractors to employee status within their company.

It's a heavy trend, and independent contractors
currently have the choice of accepting a
permanent position with one of these few big
names of face the real prospect of being out of
work for several months. I know several
highly skilled contractors who spent between
5 and 13 months at home with no income, slowly
eating into their savings, until they found
another contract.

The ugly part is that hourly rates for
contractors are down 40-60% this year compared
to 1999, and contractors switching to employee
status face even bigger paycuts.

Personnally my contract ends at the end of May,
and I have been offered to continue my current
work as an employee instead of as a contractor,
and I am being offered a whopping 66% reduction
in my compensation. Still, I might stick with
the job, it's better than no job at all.

This is compounded with a 4.6% inflation rate,
and a 45% surge in housing prices in the last
year, a 15% increase in real estate taxes, not
to mention the effect that the stock market
crash has had on my savings.

But for these shell companies, these are good
times; for each open position they receive
a few hundred resumes of skilled IT
professionals who are currently unemployed
and eager to accept the job, no matter how
low the salary.

More w/ Less.

[Anonymous Coward]

I have had positive experiences with Volt. They took the least percentage of the approved vendors and kept to their commitments. On the other hand (ssai.c0m) will screw you like a twenty-five cent whore but only if you are a former lingerie model.

Talk to an accountant

[HWheel]

Be very careful.... I've been working under an S-corp agreement for more than a year now, and there are some tax tricks that only an accountant can help you get to take advantage of being an S-corp. I could NOT fill out the end-of-year tax forms myself as an S-corp (I'm just not tax savvy that way, or interested enough to read and understand all the fine print) so I had to use an accountant, but he made some great suggestions (including deducting part of my apartment rent as office space and advice on buying equipment!) that made it worth the hundreds of dollars I pay him. Unless you're pretty financially geeked, I'd definitely find an accountant and have a serious chat before you go too far.

tagline question

[theglassishalf]

Is your tagline from Rhapsody in Blue?

Re:tagline question

[MarkusQ]

Is your tagline from Rhapsody in Blue?

Yes.

-- MarkusQ

W2 is often less riskier

[Anonymous Coward]

I'm my experience going the w2 route is nice, since the shell company should float you a paycheck i.e. pay you in realtime, before the client pays them. This was a huge benefit. I could have made more money via a 1099, but wasn't as comfortable with the pay schedule and associated risk.

Professional Association of Contract Employees

[MichaelCrawford]

I don't have any direct experience with the Professional Assocation of Contract Employees, but their Contract Employees Newsletter is useful and informative, and based on what it says I think they are good folks.

You may also be interested to read my pages Market Yourself - Tips for High-Tech Consultants and GoingWare's Policy on Recruiters.

UNIX Admin team forming consultancy

[emptybody]

I am manager of a unix admin team. Recent changes in the company have sent all of us looking for new employment. We are looking to form our own consultancy. We are distributed along a 100 mile stretch so will share the burden of on call etc.

Anyone else out there forming companies of their own? Any tips or book pointers for those of us starting out?

Re:UNIX Admin team forming consultancy

[Anonymous Coward]

Well, I am not sure where you are (all of this works in Texas), but I have some suggestions:

1. When you are billing, take the "normal" rates and increase them 10% when you are bidding jobs (if they will screw you here, it is just the first step, and you really, really don't want the contract because that is just be beginning of the sphincter enlargement). Then offer a "discount" of 10% if they pay net-15. Most accounting departments will jump at this and when everyone else is going 60-90 days on "net 30", you get paid in the next check run. Sounds cheezy, but it works.

2. Use ADP for payroll, tax compliance, and so on. Bank of America partners with them. This made our lives so much easier it is not even funny. $800 a year. Also, they let you set up a 401k through them. Talk to an accountant, but you can offer people a lower salary and full matching and take the same pay rate and let them sock it into an IRA. Clueful people will jump at this. Basically, you let them defer taxes on 30% of their income. Programmers may not understand and/or get surly even when you explain it to them slowly (somehow, they always think that they are getting screwed), but sensible people (and the odd sensible programmer) will be very happy.

3. Keep a lot of liability insurance, go light on the "errors and omissions" insurance. Then nail down the statements of work with the clients *HARD* and don't hire idiots.

4. Unless you really, really know the person, drug test. I can give you several programmer stories (we were all sysadmins and knew more or less how to hire programmers, but this bit us twice -- after drug testing, never again). I am not trying to bag on programmers, but speed and coke comes up on a regular basis. With the better/older ones, not really too much, but drug testing make a concrete difference here. We ignore pot.

5. Do not pay 1099 contractors' insurance. It makes them employees. You should sit down with an accountant and an attorney and look at what you can and cannot do here. There is also a difference (with major, complex tax implications) between "staffing" and "staff leasing" that can bite you in a huge way if you also have contractors disallowed as non-employees. It will break your company finacially. We were always jumpy, but I have seen this happen twice and the companies went out of business. Imagine having to pay penalties and back taxes for all of the employees that you have had for the last several years at once. Riiiiiiiiiiight, and Lundberg would say.

6. Sit down with an attorney and an accountant and work out deductions ahead of time. Toll payments for driving to work? Keep records. Gasoline? Keep records. And so on. This can add up a lot by the end of the year. If you have employees where this applies, make them do this as well.

7. Have a concrete, detailed, and specific employee handbook. Yes, seriously cover stuff like body odor at the client site. Make people sign off on everything. However, don't bother with restrictive non-competes -- just make people agree to not engage in industrial espionage and leave it at that.

8. Do a basic background check, all 50 states, and a criminal records check. This is worth the money. Ignore most credit problems if they are not recent. Let the client know that all of your employees passed this screening. You would be amazed (well, maybe not) at how many temp firms never bother to do this, but a lot of employers are not. This is good for everyone. If the person has an old legal issue (a pot bust 20 years ago), let the employer know and let them make the decision. Do not ever hire people with anything like a predatory sexual conviction (i.e., getting busted for public lewdness with your girlfriend in the back of her car is not the same as a pleaded down misdemeanor for flashing schoolgirls). Talk to an attorney to figure out how to do this legally. In general, if they sign a release, apart from specific legal areas, you are good to go. No release, no interview (se