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Sole proprietorship

I've just started on my first consulting gig and was wondering if it's necessary to get a business license or not. 

Also, would it offer any benefits to get a separate bank account if I'm just going to start out as a sole proprietorship?  It seems that as a sole proprietor, someone who sues you can still get to your personal bank account if they want to regardless of whether or not you have a separate bank account for the business.  The personal asset protection seems to only be available if you incorporate.

I realize that this is more of a software board, but it seems that there's probably several contractors here that could help.  If there's a better place to ask this then please do let me know.

Thanks for any help!

Techie
Thursday, February 20, 2003

I am NOT a lawyer. Don't take any of this as legal or business advice, only misdirected rantings...

>> I've just started on my first consulting gig and was wondering if it's necessary to get a business license or not.

Probably not - you will be under the radar sites of the local authorities since you're likely not going to be hiring people, advertising, or operating a storefront. Just look into what you need to do in order to pay local jurisdictions their tax share of your income.

>> Also, would it offer any benefits to get a separate bank account if I'm just going to start out as a sole proprietorship?  It seems that as a sole proprietor, someone who sues you can still get to your personal bank account if they want to regardless of whether or not you have a separate bank account for the business.  The personal asset protection seems to only be available if you incorporate.

You should use a business accounting program such as Quickbooks to generate invoices and to track your hours and expense and income activity. The purpose of a separate bank account as a sole prop. is mainly to organize and separate your business activities from your personal activities, and also to support a doing business as (DBA) name if you choose to get one.

You are correct about the liability and personal asset issue. A sole proprietor "is" the business while a corporation would provide some legal firewall against lawsuit liability.

Bored Bystander
Thursday, February 20, 2003

Another advantage of having a separate Bank Account is that you can get the bank account in your business name. Therefore your cheques have your business name on them rather than you.

As for sueing, you can still lose personal assets with a Proprietary Company if you are shown to be negligent. (At least here in Oz) So professional liability insurance would be more important I think.

Matthew Lock
Thursday, February 20, 2003

Definitely get the separate bank account to keep track of business transactions.

I would also see if you're allowed to create an S-Corporation.  Although you would have to do some paperwork, it allows you to have the benefits of a corporation (limited liability) and the benefits of a sole proprietorship (no double taxation).  This may not be an option if you are not in the U.S. or if your state doesn't have this provision.

Ankur
Thursday, February 20, 2003

There are also things like LLCs, etc.

I don't know anything about business really. You want separate accounts just for your own accounting purposes, and you will want them for tax purposes real soon. Licenses are by jurisiction (state, city, etc).

There are lots of books out there on the subject. Nolo Press is a leading publisher in the legal self-help field.

http://www.nolo.com/lawstore/products/product.cfm/objectID/749AB100-5AFD-479C-A637A296A830F6E2

mb
Thursday, February 20, 2003

If you do not know how to research this yourself, it may be a good idea to spend the money and talk to an accountant. 

Are you getting paid on a W2 or a 1099 ?

Bella
Thursday, February 20, 2003

"The personal asset protection seems to only be available if you incorporate."

And even then, many banks require a personal guarantee before providing you with the account (especially if there is credit involved), which tends to dilute if not negate the personal asset protection altogether.

Unless you want to do business under a different name, you probably don't need to get a business license (given your size and lack of employees etc).  If you are not doing business under a different name, getting a separate bank account is an expensive way to keep track of what revenues and expenses were incurred as part of your business activities.  I'd only recommend it if you believe you will have difficulties keeping track.

If you are doing business under a different name, I believe you are required to get a license - in which case it quickly becomes embarrassing/vaguely unprofessional to say "Company X - please make cheques out to Individual".

Phibian
Thursday, February 20, 2003

Interesting coincidence, since I just had a meeting about these exact same issues with the community business board.

I too wanted to incorportate, but it turns out that the overhead in cost and maintenance with running a corporation versus a sole propriertorship is much more involved and since I am alone on my venture, all it would do is suck more money and time out of me, without any of the real benefits until my business started making atleast $200k+ a year.  I would also have to invest more into using a Lawyer and a certified  Accountant.

With this much work in just "organizing" the business, I fear it would just distract me from actually focusing and "running" the business (software development in my case).  It was recommended that I start small with sole prop. which suits my position at this time and I can incorporate anytime I feel like in the future.  $65 vs. $1000 also sounds like a much better deal.

Regarding liability issues.  You treat it as a calculated risk.  My company will be developing PDA software; not running a construction site or keeping a nuclear power plant under control.  So the chances for getting sued are much lower.

sedwo
Thursday, February 20, 2003

Thanks to everyone for the tips.  I think I'm going to get the business license anyway even if it might not actually be needed -- just for peace of mind -- it's only $75 plus their tax rate of ($0.60 - $2.15) per thousand at the end of each year.  Also, thanks for the insight about DBAs -- I'm just going to use my personal name and not do a DBA for now.  If I happen to start consulting a whole lot then I may later on incorporate.

Bella:  I'm paid as a 1099.  The contract work for this project lasts around 3 weeks and then I may find work as a regular W2 employee.

Getting a laywer and accountant was a choice that I considered, but I didn't want to waste a whole lot of money for something that seemed on the surface easy and especially since I'm not sure if I'll be doing anymore consulting after this one short project and will instead find work as an normal employee.  Their professional advice might eat up around half of the money from the project.

Techie
Thursday, February 20, 2003

get a separate account. i know a guy who had one account in texas. he failed to keep up with paying the state his sales tax , and they came and emptied his acount. If you keep two accounts and the state sucks out your sales taxes , you still have the money in your personal account to pay the mortgage.

tex
Thursday, February 20, 2003

My wife, a lawyer, offered this; "It is malpractice to recommend anyone start a sole proprietorship". I think that says it all.

She suggested looking into an LLC.

Marc
Thursday, February 20, 2003

>> The contract work for this project lasts around 3 weeks and then I may find work as a regular W2 employee.

It seems like a lot of work (both now and at tax time) to go through for a 3 week gig. Do you actually need the money that bad (or is it a rediculous amount) for this much effort?

If you were planning on continuing as a 1099, it would make sense - but not just for 3 weeks...

RocketJeff
Thursday, February 20, 2003

Marc: Thanks for the advice.  I just don't want the extra hassle of figuring out how to handle taxes with an LLC.  That is one of the entities that I was considering though if I chose to do more consulting and wanted more liability protection.

RocketJeff: I figured for a 3 week gig it may not seem worth it, but I'd prefer to stay on the safer side of the law even though the tax assessors won't probably care about the pocket change I'm making during the 3 weeks.  Plus I see it also as an investment in a learning experience, and I'll know more what I'm getting into if I do decide to make  consultanting a full-time career.

Techie
Thursday, February 20, 2003

<<My wife, a lawyer, offered this; "It is malpractice to recommend anyone start a sole proprietorship". I think that says it all.

She suggested looking into an LLC.

>>

Agreed, even though I'm not a lawyer.

The other thing is that if you're being paid on 1099 it's not going to matter if you're a sole proprietor or not.  A 1099 is made out to an individual.  You WANT to submit an invoice if at all possible.  I avoid 1099's at all costs.  1099's require you to pay a little over 15% for self-employment tax plus your income tax rate (same for a sole proprietorship).

That is the reason that I have an S-Corp.  You don't have to pay self-employment tax on every drop of income that comes through.  Some of it can be retained as profit and tax at your normal tax rate.  In my case, the tax reason is more important to me than the liability protection.

Jonathan A.
Thursday, February 20, 2003

Techie,

One thing about liability protection and contracts in general: a Nolo Press book titled 'Consultant and Independent Contractor Agreements' (about $30) contains boilerplate agreements, and a CD of the agreement text in RTF format.


I used one of their agreements for software contracts for a project. This book has two SW contract agreements - one for fixed price and one for hourly. Both have language that limits the contractor's liability for damages and which binds the client to indemnify you from third party claims (IE, an example being that you get sued by a customer of the client because of work you did for the client.)


Having said that, and with the advice about LLCs and sole proprietorships a given, one important thing to note is that ANYONE can sue you for ANY reason at ANY time and there's no such thing as being completely, perfectly covered. If the offer is on the table and you screw around too long, you may not have *any* work.

Bored Bystander
Thursday, February 20, 2003

Techie,

For tax purposes an LLC is what is known as a "pass through" entity.  You prepare a Schedule C (business profit/loss) exactly as if you were a sole proprietor.

Paul

Paul
Thursday, February 20, 2003

Bored Bystander:  Thanks for the info on the Nolo CD and about software contracts.  I'll definately take a look at those if I get anymore contract jobs.  I understand that incorporating only protects personal assets, doesn't protect one from being sued, and anyone can still sue you despite the type of company entity formed.  Thanks for the advice.

Paul:  That's interesting and nice to know LLCs have such easy tax requirements.  I'll probably either go with an LLC later on due to the simple tax procedures, or if I start paying a lot of taxes and want to cut down on taxes a bit then I'll take Jonathan A.'s advice about doing an S-corp and retaining profits within the company.

I've posted this question to other sites and haven't gotten such great responses as these.  This definately says something about the caliber of people that visit and hang around here.  Thanks to everyone for the help and wish everyone well!

Techie
Thursday, February 20, 2003

Also note that an established company can sit around for years without any income, as long as there's no expenses.  So establish it properly now and use it whenever you freelance in the future.

Especially if there's LLC's or other such structures available in your area, it's a very nice deal with minimal extra setup difficulties.

flamebait sr.
Thursday, February 20, 2003

Techie, 
If youre contracting for 3 weeks on a 1099, Paul is right, you just declare that on your Sch-C.  You'd be a fool to set up ANY kind of business entity, trust me.  It's a lot of paperwork, and a irrational cost/benefit.  Concentrate on your dayjob, not trying to become some bigtime consultant.  That will come in time. 

Keep it simple, trust me on this.  No corp, no c-sorp, no LLC, no NOTHING!!  Look up "Schedule-C" thats ALL you need to know.

Bella
Thursday, February 20, 2003

>> Keep it simple, trust me on this.  No corp, no c-sorp, no LLC, no NOTHING!!  Look up "Schedule-C" thats ALL you need to know.

"All?" Not quite. Add to that - a written contract! I've known contractors who were screwed mightily (myself being one of them) by not having a written contract in place. It can be simple, it can just be a letter of agreement, but definitely have a written contract in place that defines when, how and exactly for what you get paid.

Nolo Press. Thirty bucks.

Bored Bystander
Thursday, February 20, 2003

True.  Contract.  Also, make a nice simple invoice (Excel, Word, whatever) and hand it in on time.  (Weekly, bi-weekly, whatever.)

The best way to protect yourself from getting stiffed is to promptly bill.  That way, you will know if you are getting stiffed sooner than later.  That results in less free work from you in case you need to walk out.

Bella
Thursday, February 20, 2003

See if you can get paid in cash. That is the ideal situtation. If they don't cosider your proposal offer the manager a rebate on services and see what he says.

Richard Marks
Thursday, February 20, 2003

There is web site ( www.tinaja.com ) run by a gentleman named Don Lancaster.  Don's site is not unlike this one, meaning that you come for a minute and stay for an hour.  Don has much to say on this subject.  Most of it is available for free on his site.  I highly recommend you look at it.

Michael

Michael John
Wednesday, March 05, 2003

Yes, I have been reading alot about what you all have to say concerning sole proprietorship versus Incorporation. I am looking into opening a dayspa & salon within the next 6 months. I thought I would start out as a sole proprietor, but then I realized the liability would be to great. I talked to my accountant and he suggested a LLC. But, as I linked onto myflorida.com, I realized alot of salon's and dayspa's incorporate. I know you are not a lawyer and cannot give legal advice, I am just asking for wisdom in this situation. If you were in my position what would you do? Incorporate or LLC?  Thanks, Shar

Shar
Tuesday, May 04, 2004

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