
Ask HN: Need advice for starting freelance biz and eventual startup life. - precise
[Note: I'm using a throwaway account for anonymity]<p>I'm currently working at a small development agency and things are looking grim. It looks like the company may have 2 to 3 more months before it goes under (due to circumstances outside of my control. Poor business decisions.)<p>In my off-time I've been working to develop a few freelance connections and have lined up several projects for the next few months. Until now freelancing has been just a way to supplement my (low) income from my development job, but I would like to switch over to freelancing fulltime and eventually work on my own application. While I'm not generating enough freelance income to live yet, I'm confident that if I was focusing full-time I could.<p>I'm sure this has been asked several times in the past, but what should my next steps be? I haven't set up any formal business for myself. Is an LLC the best bet for a freelancer who wants to release an app eventually?
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MicahWedemeyer
I'd recommend finding an accountant (ask other local freelancers for
references) and have them handle all the business incorporation issues (LLC vs
S-corp, payroll taxes, etc, etc). It will cost more than doing it yourself,
but they may end up saving you money, and you'll definitely sleep a little
better.

No offense to anyone in particular, but beware the legal/accounting advice you
receive here on HN. Just like you shouldn't ask an accountant for programming
advice, it's not a great idea to take accounting advice from a programmer. Pay
an accountant to handle things, at least at first. Have them teach you how to
handle payroll taxes and quarterly filings and all that stuff. You may find
it's easy enough that you can do it on your own. Or, you may find that it's
complicated and you're glad to have an accountant handle it.

~~~
pasbesoin
While taking this approach, does it make sense to read and familiarize
oneself, to the level of layperson, in advance, to the extent possible? The
purpose being to make those meetings as efficient as possible and maximize
knowledge transfer.

If so, does anyone recommend particular resources?

My biggest concern is liability. I don't want any more potential attachment to
present and future personal assets than necessary.

EDIT: I'm seeing some references/recommendations in the other comments. So
thanks, and sorry if my query begged repetition.

~~~
MicahWedemeyer
Educate yourself, sure. But don't get any ideas about how much you know. When
you do meet with an accountant, go in with ears open and mouth shut. You
probably don't know half as much as you think you do. Plus, their knowledge is
what you're paying for. If you don't utilize that, you're not getting your
money's worth.

Finally, it's probably a good idea to at least get a cursory second opinion.
From what I've seen, accountants are a lot like programmers. Where one is
adamantly behind Ruby on Rails, another will recommend PHP. There probably is
no single right answer, but it never hurts to hear opposing viewpoints.

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andreshb
1\. Create an LLC (not sure in what state you are, but in florida it takes
about 10 minutes, it's an online form)

2\. With step 1, you can get a Business Checking account (some banks have
free, I've used chase)

3\. Get an account on freshbooks for your billing (invoicing, bookkeeping,
accounting -- it will help when taxes comes around and in general to keep
track of the financial health of your company)

I highly recommend you do freelance with your LLC in case you start signing
contracts and there is a dispute, they'll go after the LLC, not after your
personal assets.

Some things can be logged as business expenses, and some as personal expenses,
just use common sense, and do talk to an accountant when you have to file
taxes. The LLC itself does not pay taxes, you pay the taxes as income when the
money goes from your LLC to you.

About explains it better:

"The tax implications of an LLC differ from those of corporations. LLCs use
"pass-through taxation," which means the LLC does not pay taxes. Income from
the business is instead passed down to the company's owners, who are called
members in LLCs. They claim the profits or losses on their personal tax
forms." <http://sbinformation.about.com/od/ownership1/a/llctax.htm>

IANAL

~~~
mburnett
Be sure to setup that business bank account quickly. It can take a few weeks
to get everything in order. I believe you can do it as long as you have your
Employer Identification Number (EIN).

<https://sa1.www4.irs.gov/modiein/individual/index.jsp>

This means you can do get the bank account and apply for the LLC in parallel.

~~~
midnightmonster
In Florida for me, both the biz bank account and the llc were extremely fast.
Llc was an online form with instant results, and biz bank account just
required a visit to the actual office of my credit union. I needed the llc
first in order to get the bank account in that name.

------
JangoSteve
_While I'm not generating enough freelance income to live yet, I'm confident
that if I was focusing full-time I could._

What exactly would you do differently working full-time that you can't do now
while still at your job?

I ask because I thought the same thing when I first considered quitting my
full-time engineering job to freelance. But then I came to the conclusion that
it was just a justification that would allow me to immediately do what I
wanted (quit) while putting off the tedious part (find more freelance work).

In the end, I chose to be a bit more prudent, and actually line up enough work
to comfortable quit without worrying too much. So I went out and found enough
work that would allow me to make as much as I was making at my full-time job
for at least 3 months (noting that my rate was significantly higher, so it
only amounted to finding about 25hr/wk of work for 12 weeks). Even then, I was
still nervous as hell when it came time to give my 2-weeks notice.

By far the easiest way I found to line up a solid 3-months of freelance work
before I was actually doing things full-time, was to find a full-time
development firm and work out a subcontracting agreement with them.

~~~
precise
I've had steady work for the past few months and I'm working with other design
firms/agencies that seem to have a steady flow of work. They're impressed with
what I do and I'm having to turn down work because I don't have time to
complete it. I realize that I need to put away a nice amount to be ready for
dry periods, but I have that.

To answer your question, I could spend more time freelancing than I can while
still at my current job.

~~~
midnightmonster
If you're having to turn down work at a comfortably livable pay rate
(considering additional taxes, health insurance, etc.) for lack of time, and
this is an ongoing situation, not a one time fluke, then I agree it's likely
you'll be able to do just fine going freelance full time. And if your current
job is approaching the end of the line, it's probably a good time to make that
jump. Not worth all the energy you'd have to invest in finding another job and
getting up to speed only to quit N months later.

~~~
precise
I suppose I should have mentioned I'm already paying my health insurance
(current employer doesn't offer it). Thanks for your help!

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mbenjaminsmith
Assuming you're in the US, it doesn't take any paperwork to do business as a
sole proprietorship. You and your business are legally the same, you have
unlimited liability (unlikely to be an issue for you) and you pay taxes the
same way you do now.

Read as, spend all of your energy finding income-generating projects at this
point. You're safe as you won't run into any tax issues down the road you
forgot to prepare for.

~~~
kls
no you pay 15.3% more taxes on your salary. This is you a portion of your
taxes that your employee and now you will be responsible for. As well, never
do business under your own personal liability, while software is low risk, if
you get into a litigious contract dispute you could loose everything. You want
to limit your liability and you want to form a S-Corp. Go to an accountant or
attorney, not doing this correctly could be a costly mistake, if you truly
can't afford one then educate yourself and file online for $50 bucks or
whatever they charge now.

~~~
precise
This is exactly the type of advice I'm looking for. Does anyone have any easy
to understand/comprehend resource that lays out step by step what I should be
doing? Maybe that just doesn't exist. I am located in the US.

~~~
patio11
Your local Small Business Administration, and probably state- and local-level
organizations of the same type, has someone sitting by the phone absolutely
freaking _eager_ to mail you a pamphlet or two designed to be comprehensible
by fifth graders. Make that guy's day.

~~~
felideon
Agree. Type this in Google:

small business development center <<state name>>

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jtbigwoo
Lots of good advice about corporations and I thought I'd throw in my two cents
about finances.

\- Find a CPA and a lawyer you can work with. Choose supporting professionals
that match your risk tolerance. The self-employed can be very aggressive
regarding taxes, litigation, and financial engineering (and likewise accept
more risk of audits and penalties.) If you want to be aggressive, choose an
aggressive CPA and an aggressive lawyer. If you're more conservative, do the
opposite. Don't expect that a professional will be conservative just because
she works for a larger firm. In fact, the opposite is often the case.

\- Get a business checking account and a business credit card. Many banks
offer free checking and no fee credit cards to small businesses. Try to be
good about using the business accounts only for business expenses and you'll
be much better off at tax time.

\- Open a high-yield money market or savings account. Don't let your cash sit
around in the checking account. Even with today's crappy interest rates, you
can make a few bucks each month. Your bank might have good rates or you can
look at Everbank or Capital One. (Costco members get a rate bonus at Capital
One.)

\- Set up a retirement plan. A solo 401(k) or SEP-IRA is simple to set up and
you can save a ton of money for retirement and help save on your taxes. A solo
401(k) lets you contribute the most (up to $49,000/year,) but it's a more of a
pain to maintain, especially if you plan to have employees. Talk to your CPA
about which is right for you. T. Rowe Price, Vanguard, and many of the other
big financial firms offer cheap or low-cost small business retirement
accounts.

\- Talk to a CPA and ask them to explain how to pay yourself a regular salary,
withhold taxes, withhold retirement contributions, etc. Actually doing the
payroll yourself is not hard, but there are plenty of companies that will
administer your payroll for $30 - 60/month if you don't want to do it.

\- The more clients and expenses you have, the more you need some sort of
accounting package. If you have one or two clients and few expenses, a
spreadsheet is probably fine for bookkeeping. If you have more clients or lots
of purchases and expenses, a simple accounting program will help a ton.

------
mjfern
Pick up a copy of "Working for Yourself: Law and Taxes for Independent
Contractors, Freelancers and Consultants." It's an excellent book that
provides detail on legal forms (LLC, S-Corp, etc), tax issues, insurance,
record keeping, client agreements, etc. I highly recommend the book for
someone just getting started as a freelancer.

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midnightmonster
I've been in a similar place. When my wife lost her job a couple years ago and
we lost our housing (came and went with the job), I went full-time with my
freelance work and became our sole income.

Think of the business entity as a form of insurance. You have to go through
some hassle to set it up, and you have to maintain it at a minimal financial
cost and possibly more significant paperwork time cost. If properly maintained
it provides some legal protection of your personal assets if you are sued, but
less than you'd think for a freelancing business. You decide whether it's
worth the bother. I went ahead and did the LLC--it just seemed like a good
idea to me, and it helps my brain a bit to have a separate legal entity for
the business. When you get ready to actually release software, you may want to
have a lawyer help you revisit your decision, whatever it was.

A separate business bank account is essential regardless of your organization
you will need an EIN from the IRS. Just google for how to get one. It's free.

I use fresh books but have not found it to be really adequate for forming a
solid financial picture. I'm currently using a beta version of gnu cash, but
it won't be just right until I get around to enhancing it with some reports of
my own.

Your tax situation will change. You will have no withholding, so you'll need
to make quarterly payments. IRS interest charges are not out of line, but they
can really add up over the year if you don't pay attention to this at all.
Google "estimated payments safe harbor". Of course you're also going to be
responsible for self-employment tax, which looks like it will be considerably
more than my income tax this year. Use the google for calculators to estimate
both so you know how much to be saving along the way.

Good luck, and ping me via letterblock.com if you want.

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gte910h
Create an LLC

Get a forwarding number now (google voice, twilo, etc)

File for a business checking account

File your taxes as an S Corp (there is a form with the IRS, you only have a
certain number of days after you start doing business to do this).

California is expensive to do an LLC. Nevada, Delaware and Georgia are much
less so.

Here is an old blog I did about when I setup the company I now do product
development through (although I work with other people, you sound like you're
going solo).

It goes through the steps of setting up your business, etc (but is slanted
heavily towards Georgia):
[http://www.rowdylabs.com/blogs/pitchtothegods/archives/2006_...](http://www.rowdylabs.com/blogs/pitchtothegods/archives/2006_10_01_pitchtothegods_archive.html)

I suggest Google Checkout/Zoho Invoice for invoicing.

I suggest cash method of accounting (accrual method is a LOT of paperwork and
its a pain to switch to cash later, but not hard to switch to accrual later).

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klous
IANAL: If you just want some personal liability protection, an LLC is a good
move. Also, you should have a business checking account and do not co-mingle
funds to maintain the separation. If you plan on having investors in your
company, you'd probably want to consider a corporation at that point. For more
information, checkout the Nolo resources online, at your library, or on
Amazon. [http://www.nolo.com/legal-
encyclopedia/faqEditorial-29070.ht...](http://www.nolo.com/legal-
encyclopedia/faqEditorial-29070.html)

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mburnett
Just remember that if you create an LLC (in any state), but operate that LLC
primarily in California, you are required to pay this ridiculous "tax" of $800
per year (due within 90 days of when you first setup shop).

<http://nolonow.nolo.com/noe/popup/NNLLCCABAS_faq.html#topic5>

Also, I setup my LLC by just filing a few government forms instead of
something like LegalZoom and it wasn't much trouble at all.

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alexwyser
Hi. I am a freelance web designer. I am starting a distributed web design
firm. Basically its a couple of freelancers, who are collaborating together so
everyone can benefit from everyone else's skills and local reach.

If you are interested then email me at alexwyser@gmail.com

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felideon
IANAL/IANAA: I believe an S-Corp is cheaper to set up and should work well for
your consulting/contracting business.

You could then incorporate a separate LLC whenever you're ready to work on an
actual product and are planning to raise money from investors.

~~~
jey
LLCs are easier. You can file a petition to request your LLC to be taxed as an
S-corp if needed.

~~~
felideon
I think I meant cheaper, or got confused for a minute. But that's interesting,
I didn't know your LLC could be taxed as an S-Corp.

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hotmind
My advice is to not go LLC until you fully understand what you're doing and
why you need it.

Also, when you incorporate, get close and personal with an accountant.

Your next step would be to get some business cards printed out and start
beating on the doors of local business owners. The conversations you have with
them will be very informative and point you in the direction you need to go
(and hopefully get you some clients).

Best of luck to you.

