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Starting a design company for myself

Postby bpovich » May 7th, 2014, 9:04 am


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Hi all,

I'm an industrial designer / package designer that is looking to start my own freelance business. I'm wondering if anybody can offer advise for starting up in regards to:
sole proprietorship vs. C Corp vs. LLC - I realize LLC is a good option to limit risk but is it necessary for starting up a small freelance company?

I plan on just perusing small stuff for now and want a good way to write off expenses and just run a business where I do all the work myself. Hopefully it will get bigger in the future but it's mostly just a way to handle my freelance projects.

Anybody have any advise?
B Pov

Re: Starting a design company for myself

Postby iab » May 7th, 2014, 10:30 am


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I started as a sole proprietor. But that was when I was running out of the home office and all equipment was mine.

I did switch to LLC when I started renting an office and signed a lease. As you stated, an LLC protects you from financial risk. I can't imagine a case where if things got so bad with a client they would sue me for money they already gave me. If they don't like the work, they withhold payment, I do the suing.

The risk comes when you owe someone else. A loan for equipment. 36 months of rent payments.

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Cyberdemon
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Right - the liablity is the issue. Ultimately as a sole proprietor you have assumed all risk. I was once comically sued for $10 or 15k for not giving a client back prototypes after he refused to pay me for work that was completed. In the end it was all BS but had sh*t really hit the fan then it would have gotten ugly.

The LLC can come with some additional costs depending on your state, so you just need to assess the other issues and decide if it's the best choice. If you are planning on going full time as a consultant/freelancer then I would say yes, bite the bullet now and set it up. It can also make life easier since some clients may not want to make out the check to your personal name.

Re: Starting a design company for myself

Postby iab » May 7th, 2014, 11:36 am


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Cyberdemon wrote: It can also make life easier since some clients may not want to make out the check to your personal name.


Sole proprietor can do a dba (doing business as). Sign the check over to you and Bob's your uncle.

Re: Starting a design company for myself

Postby chevisw » May 7th, 2014, 11:54 am


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Are you in the States, and if yes what State?

when i started my own company i was given a piece of advice - know what you know and what you dont know hire a professional.

Legal - areas
Accounting Areas - careful hiring "contractors" to help you....

As i do not want to type it all out let (feeling lazy) me know if you want to have a phone conversation i would be happy to discuss my experiences success as well as lessons learned.

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Every time I've heard anyone talk about this, the default answer is "LLC! No liability, no brainer!"

I have to wonder though, are there times remaining as a SP would be advantageous over taking on extra costs of operating as an LLC?

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Scott Bennett
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No, never. The cost of starting an LLC (at least in my state) is less than $100. As a sole proprietor, you are personally liable for any business debts, lawsuits, etc. The day you lose your house in a judgement you'll be wishing you had gone ahead and spent the hundred bucks and 30 minutes it takes to setup an LLC.

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Ahh. Makes sense. My neck of the woods though, I have been told (by an acquaintance who did so for his wife) to budget $2500-3000 to get an LLC registered and up and running..I set up a dummy SP to just go through the motions earlier this year and it was about $90, in comparison. Harder pill to swallow (I also rent :-p), but I definitely see the advantages.

Re: Starting a design company for myself

Postby iab » May 7th, 2014, 1:12 pm


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Scott Bennett wrote:No, never. The cost of starting an LLC (at least in my state) is less than $100. As a sole proprietor, you are personally liable for any business debts, lawsuits, etc. The day you lose your house in a judgement you'll be wishing you had gone ahead and spent the hundred bucks and 30 minutes it takes to setup an LLC.



Wish it were that easy in Illinois. iirc, initial filing was around $800 (no lawyer fees included, just the state fees) and every year you had to file an annual report that cost an addition $250-ish.

Doing the filing, annual report and then the K-1 for taxes takes time. By no means is it "easy" if you do it nor is it "cheap" if you have a lawyer do it.

You need to balance the actual risk you face and the time and money involved between an sp and an llc. To blindly say you have to go llc is not the right answer.

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Cyberdemon
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Fees to set up the LLC initially both legal and state license fees should also be able to be part of your tax write offs come tax time.

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Generatewhatsnext
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bpovich wrote:Hi all,

I'm an industrial designer / package designer that is looking to start my own freelance business. I'm wondering if anybody can offer advise for starting up in regards to:
sole proprietorship vs. C Corp vs. LLC - I realize LLC is a good option to limit risk but is it necessary for starting up a small freelance company?

I plan on just perusing small stuff for now and want a good way to write off expenses and just run a business where I do all the work myself. Hopefully it will get bigger in the future but it's mostly just a way to handle my freelance projects.

Anybody have any advise?


Congrats on your adventure, it'll be fun, and stressful, and rewarding!

Like others have written, an LLC is a good bet but you have other options as well. We incorporated Generator as an S Corp for a few particular reasons - the structure is that of a large Corporation without the large accounting bills and upkeep, the payroll tax structure is excellent (see excerpt below for an example), the liability shelter is excellent (see second excerpt below) and the ability to easily move from Corporation assets to personal assets (or vice versa) worked for us since we're a family business.

More than anything, I recommend consulting with a business accountant.

Secondly, we're in need of a packaging engineer for a small project, the two I use are otherwise busy - shoot me an email if you have room on your plate!!

...S corporations, or Subchapter S corporations, produce several tax benefits as compared to sole proprietorships, partnerships, and C corporations. The big benefit--and the one that people usually talk about--is the payroll tax savings. To understand how this works, let's compare two alternatives: A sole proprietor making $90,000 a year and an S corporation making $90,000 a year. Of course, the taxes that a sole proprietor pays depend on his or her filing status, itemized deductions and family size, but typically such a person might pay about $12,000 in federal income taxes. The person might also pay another chunk in state income taxes. In addition to these income taxes, the proprietor also pays a 15.3% self-employment tax on the $90,000 of business profits. Roughly, this self-employment tax (which is equivalent to Social Security and Medicare tax) equals $13,000. Things usually work differently when a business has made the Subchapter S election, however. To make calculations easy, assume it is owned by a single shareholder. The corporation must break the $90,000 of profit into two buckets: wages and the leftover (which is called a distributive share). If the wages equal $40,000 and the leftover distributive share equals $50,000, the business pays Social Security and Medicare taxes (equivalent to self-employment tax) equal to roughly $6,000. In this case, even though the two businesses make the exact same amount of money, the sole proprietor pays roughly $7,000 more in tax each year. In addition to the big benefit of self-employment tax reduction, S corporations also provide two other useful benefits--benefits which are a little more difficult to quantify but still important nonetheless. One such benefit is that an S corporation can use losses (such as those that often occur in the early startup years) as tax deductions on the shareholders personal income tax returns. Additionally, the S corporation is not taxed on its profits--at least by the federal government...

...An S corporation operates much as a partnership or limited liability company in that income and expenses are “passed through” to individual owners’ tax returns, avoiding the double tax of C corporations. Yet an S corporation protects personal assets from debts and claim against the company, a protection shared by all corporations and LLCs. Only shareholders' actual investments are at risk...
Scott Snider
Partner, Product Development
Generator, inc.
http://www.generatewhatsnext.com
http://www.twitter.com/generatewhtsnxt
http://www.linkedin.com/company/1023934
skype: generatewhatsnext

Re: Starting a design company for myself

Postby iab » May 7th, 2014, 4:27 pm


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Sorry to geek out, but I find this stuff interesting. Maybe a bit of overkill at the start for someone doing a few freelance projects, but fascinating nonetheless. If you have a sec, I have a couple questions about the s-corp. I don't know much about them.

Generatewhatsnext wrote:The corporation must break the $90,000 of profit into two buckets: wages and the leftover (which is called a distributive share). If the wages equal $40,000 and the leftover distributive share equals $50,000, the business pays Social Security and Medicare taxes (equivalent to self-employment tax) equal to roughly $6,000.


What are the rules with regard to this? What is stopping me from taking a wage of $1, having my distributive shares equal $89,999 and avoid fica altogether?

Generatewhatsnext wrote: One such benefit is that an S corporation can use losses (such as those that often occur in the early startup years) as tax deductions on the shareholders personal income tax returns.


How is this different from a schedule c?

Generatewhatsnext wrote:Additionally, the S corporation is not taxed on its profits--at least by the federal government...


But as soon as those profits go into the distributive share, they get taxed as income, correct?

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Generatewhatsnext
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iab wrote:Sorry to geek out, but I find this stuff interesting. Maybe a bit of overkill at the start for someone doing a few freelance projects, but fascinating nonetheless. If you have a sec, I have a couple questions about the s-corp. I don't know much about them.

Generatewhatsnext wrote:The corporation must break the $90,000 of profit into two buckets: wages and the leftover (which is called a distributive share). If the wages equal $40,000 and the leftover distributive share equals $50,000, the business pays Social Security and Medicare taxes (equivalent to self-employment tax) equal to roughly $6,000.


What are the rules with regard to this? What is stopping me from taking a wage of $1, having my distributive shares equal $89,999 and avoid fica altogether?

Generatewhatsnext wrote: One such benefit is that an S corporation can use losses (such as those that often occur in the early startup years) as tax deductions on the shareholders personal income tax returns.


How is this different from a schedule c?

Generatewhatsnext wrote:Additionally, the S corporation is not taxed on its profits--at least by the federal government...


But as soon as those profits go into the distributive share, they get taxed as income, correct?


I could give you what I think are the answers but it would be much safer for you to chat with the next business accountant you run into. We use a great accountant who guided us to our S Corp status and does a great job maximizing its potential for us. We handle our monthly payroll and document our income & expenses monthly but he handles just about everything else.
Scott Snider
Partner, Product Development
Generator, inc.
http://www.generatewhatsnext.com
http://www.twitter.com/generatewhtsnxt
http://www.linkedin.com/company/1023934
skype: generatewhatsnext

Re: Starting a design company for myself

Postby iab » May 8th, 2014, 8:15 am


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You're making me talk to an accountant?

That's not nice.

:)

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Scott Bennett
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iab wrote:Wish it were that easy in Illinois. iirc, initial filing was around $800 (no lawyer fees included, just the state fees) and every year you had to file an annual report that cost an addition $250-ish.

Doing the filing, annual report and then the K-1 for taxes takes time. By no means is it "easy" if you do it nor is it "cheap" if you have a lawyer do it.

You need to balance the actual risk you face and the time and money involved between an sp and an llc. To blindly say you have to go llc is not the right answer.


It takes about 15 minutes to setup an LLC in Colorado online. It costs $50, and the annual report is $10. You certainly can pay a lawyer $500/hour to fill out the forms for you, but there is no need.

Keep in mind you can register a company in whatever state you like (although you'll have to pay someone to act as an agent if it's not your state). Most corporations are registered in Delaware because of their favorable incorporation laws. You can get a DE agent for less than $100, so your total registration cost would be <$200.

I just filed an annual report, it took me 5 minutes, only because I couldn't remember my password. Taxes are not hard as people make out either- I have used Turbo Tax for years with some very complicated tax situations (multiple companies, state taxes in 4 states). In my worst year, it takes about 3 hours.

I don't know why anyone would elect to be a SP, especially with a design business where you bear responsibility for product liability. That is an enormous risk.

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