Ask HN: Minimum legal setup to do software consulting

[buzzdenver]

I am about to write code remotely for a couple of companies, and wondering what the simplest way to incorporate is. It would be a one-person thing, so no partners or investors. The only reason for incorporation is to expense buying hardware, but tell me if there are other perks. So LLC or SCorp or CCorp (I am in Colorado) ? I'm also unclear on the financial side. Do I set up a new bank account ? Can I use my personal credit cards to pay for company expenses ?

I appreciate any advice!

[brudgers]

I've been a sole proprietor in architecture/design for over twenty years. [1]

1. Have separate savings and checking accounts for the business and run all the money through them. It is typically easier to set these up as a sole proprietor because the personal liability works in your favor with regard to the bank.

2. Use separate credit cards for purchases, but to a first approximation don't purchase anything for which you cannot invoice a client...i.e. you don't need a new Macbook Pro and you definitely don't need to spend time pretending that shopping for one is work.

3. Generally, if you "incorporate" an LLC is the way to go because you don't necessarily have to pay yourself a salary (check with an accountant) and can just disperse money to yourself much like with a sole proprietorship.

4. Also check worker's compensation laws in regard to sole-proprietorships, LLC's, and S-corps. This is a place where I've seen people run into trouble.

5. General advice, contracts matter, but client relations matter more. You probably don't want to lawyer up to enforce some term of your contract. You're better off stopping work when you don't get paid quickly and that means having prompt payment terms in your contracts. It's even better to require a retainer payable against final invoice.

Good luck.

[1]: Architects have personal liability for errors and omissions in projects under their seal and because that is the vast majority of my liability and because an LLC/S-corp only protects against contractual liability and that is rarely an issue due to common clauses in industry standard contracts, I've never bothered with a corporate entity. YMMV.

[japhyr → brudgers]

> 4. Also check worker's compensation laws in regard to sole-proprietorships, LLC's, and S-corps. This is a place where I've seen people run into trouble.

Can you say a little more about this? What issues would someone acting as an independent consultant have with worker compensation laws?

[brudgers → japhyr]

Laws vary from state to state. Some clients require proof of compliance as a normal part of their process for letting contracts. Not all.

[IpV8]

Minimum legal setup? Don't even do an LLC, just bill send them invoices, and file your quarterly taxes properly. You can just deduct your expenses from your yearly taxes in April. You should keep receipts and a journal of these expenses in case you get audited.

[nroach → IpV8]

And if you get sued all your personal assets are on the hook for the business debt. If you die, your entire estate is on the hook for any business issues not fully resolved before you passing.

If you are young and don't have dependents or an asset base these may not be big issues. If you have a family and possessions or savings, not having a formal business structure can be devastating if things don't go according to plan.

[PaulHoule]

The "minimum" is that you have a (i) name, (ii) dba filing in that name, and (iii) a bank account in that name.

If you are a sole proprietor you can write off business expenses, so that is not a reason to form a corporation.

Software liability is a funny thing and if deliberate wrongdoing or negligence can be proven and they know your address the corporate veil won't stop them from making your life hell.

You probably will need some corporate structure once you get around the size where you are hiring managers.

There is no substitute to talking to a lawyer about this, because it is a broad topic with a lot of details. You don't need to incorporate in Colorado, however, "jurisdictions of convenience" in places like Delaware and Nevada are more expensive.

As for S vs C that is a matter how you file your taxes, not how you register your company (Delaware doesn't know if you are an S or C and doesn't care.)

[Spoom → PaulHoule]

Just a reminder that as a sole proprietor, there is no corporate veil. Your are 100% personally liable for anything you do in business. This is one of the real reasons that businesses incorporate, and possibly the most important one. Incorporation will otherwise provide more headaches, not less.

FWIW I did business as a sole proprietor for years. That said, it was always just me, and I was pretty careful. My line for incorporation would probably be when I needed to start hiring.

[mapster]

Consider basic business insurance. I don't have an LLC (sole proprietor), but keep professional business insurance ($27/mo) through major insurance firm. I pay quarterly taxes - so easy.

[GoldenMonkey]

Here in Colorado.

My lawyer recommended a Colorado S-Corporation. The filing fee isn't that much.. $50 to start, $10/yr yearly. The LLC is typically used for a partnership, but allows you to choose between c-corp and s-corp taxation. Find a cpa or lawyer for sure to setup.

[patio11]

You can expense things for tax purposes regardless of whether you incorporate or not, if they are legitimate business expenses. It goes on your Schedule C either way.

You can be a sole proprietorship instantly on saying "I'm a sole proprietorship." The first form you'd file would be Schedule C the following year. Colorado or your municipality may require a business license and/or a DBA ("doing business as") filing. My business was just myself DBA my trading names for ~6 years, until I started to get clients with employees who had titles like Senior Counsel for Vendor Contracts or Compliance Officer. At that point, having the 2 LLCs just made it much easier for them to do business with me.

You can get your LLC in Colorado if you find that to be convenient. Nevada is also quite popular -- they issue them readily online, maintenance is a breeze, they have no state income tax (you'll pay Colorado's either way but there is zero risk Nevada will attempt to get frisky with you, which is a risk with extraterratorial registrations), and their fees are fairly low. ($325 per year or so IIRC.)

The reason to segregate bank accounts is twofold:

a) (The big one) Having separate accounts makes it much, much easier to retain accurate records on income and expenses, so you pay only the taxes you legitimately owe rather than donating extra money to the USFG because e.g. you forgot a few hundred bucks of SaaS subscriptions on your personal AMEX.

b) (Far smaller) Keeping things firewalled between your personal finances and the business makes it harder to pierce the corporate veil if your LLC ever gets into legal trouble.

You should certainly open a new credit card and use it, and only it, for any business expense. It does not have to be a "business" credit card or issued in the name of your company. You're going to just take the statements from that and hand them to your bookkeeper, saving you hours of pain come tax time.

tell me if there are other perks.

There exists a spectrum of aggressiveness in the small business community on how much they take advantage of this, but: what you think as a natural human is clearly a business expense, what the IRS will invariably sustain as a business expense, and the maximum you could possibly claim as a business expense all have huge swathes in between them.

This is probably only worth a few hundred bucks a year for you, but, for example, your WSJ subscription will invariably be held by the IRS to be a legitimate business expense, on the behalf of any business whatsoever. This essentially means you get to buy it with pre-tax dollars, which is an effective X0% discount.

There are things that are a bit more aggressive. Ask your accountant where the line is. (After you have $10k in revenue, find an accountant.) This is what they're for.

[percept → patio11]

Reminder:

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Emplo...

http://www.nolo.com/legal-encyclopedia/sole-proprietors-how-...

[MalcolmDiggs]

In most locales you are by-default a Sole Proprietor already. As long as those companies are paying you as a 1099 (and not a W2) then you should be able to write off most of the expenses.

That being said, I'd recommend you head to your local Barnes and Noble and grab one of the Nolo books on incorporating a company, they are fantastic resources.