Author Topic: Advice on starting a service-based business?  (Read 2947 times)

maryofdoom

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Advice on starting a service-based business?
« on: June 09, 2015, 08:42:27 AM »
Hi friends,

I haven't been here in a long while. I had a super demanding job; then I had a brain hemorrhage; then I had brain surgery to fix it; then I got fired from my demanding job because I refused to spam people; then I had a couple of seizures and now I can't drive until the end of September.

I'm doing better now, though I'm on medication to prevent more seizures (Keppra) that occasionally just wipes me out for a day. I am also going to see a neurologist in about a month to determine a future course of treatment. My lesson to you: don't ignore a bad headache, and brain surgery is expensive.

Anyway, these events have made me really think seriously about opening up my own business. I've been side-hustling academic editing services for the past twelve years and have a pretty extensive roster of clients. I'm working on a book project right now that pays $75/hr, which will give me a big chunk of startup cash. I have personal and professional connections to at least eight universities, including Harvard.

Editing is something that I can do from home, and if I'm working only for myself, then if I'm having a "bad brain day," I can take the day mostly off with fewer consequences, or spend it doing something that doesn't need as much brainpower. And if I have more seizures in the future (which result in loss of driving privileges for six months in each case), then I'll be in the same situation that I am right now (where not being able to drive doesn't actually affect my ability to edit papers).

I am astonishingly bad at following orders from bosses that are unethical or just plain stupid; see getting fired from my last job, earlier. And the thing about that job is that I really enjoyed the work itself -- but I'm not sure if my health will allow me to work in a similar capacity for the foreseeable future. Brain issues are tricky at best and I have no idea if my condition will remain the same, or even get worse.

However, on the bright side, I have an awesome husband who has an office job that covers our monthly expenses and carries our health insurance. And our house is fully paid off!

From what I've told you, I'm pretty sure I'm going to take the plunge and incorporate myself, but has anyone else here incorporated a service business and learned anything you'd care to share from the experience?

dandarc

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Re: Advice on starting a service-based business?
« Reply #1 on: June 09, 2015, 09:04:07 AM »
Why do you think you need to incorporate?  You're already in business doing freelance editing work.  Incorporating costs money and is a bit of a hassle - if there is a compelling reason to do so, then go for it, but being a sole-proprietor is not any less "operating a business" than being an LCC or corporation.

maryofdoom

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Re: Advice on starting a service-based business?
« Reply #2 on: June 09, 2015, 09:09:08 AM »
Why do you think you need to incorporate?  You're already in business doing freelance editing work.  Incorporating costs money and is a bit of a hassle - if there is a compelling reason to do so, then go for it, but being a sole-proprietor is not any less "operating a business" than being an LCC or corporation.

Mostly for tax purposes. I believe I can get more of what I'll earn into something like a solo 401(K) if I incorporate, either through an LLC or an S-corp. Plus I may reach a point where I can't do everything myself and might need to hire other people to help me out.

dandarc

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Re: Advice on starting a service-based business?
« Reply #3 on: June 09, 2015, 09:41:20 AM »
Mostly for tax purposes. I believe I can get more of what I'll earn into something like a solo 401(K) if I incorporate, either through an LLC or an S-corp. Plus I may reach a point where I can't do everything myself and might need to hire other people to help me out.
That's absolutely not true on the Solo 401K.  It initially looks that way - the limit for a proprietor is 20% vs 25% if you're incorporated.  But all that does is equalize the 2.  When you're incorporated the 25% is on your W-2 income, and is considered an expense of the business.  When you are a proprietor the 20% is of your net.  You can't run your business at a loss for the long term, or it will be classified as a hobby by the IRS, so the equation is as follows:

So if incorporated, and having a "0" profit at the end of the day, your net before deducting self-employment expense must be: earnings + the soloK match = earnings + .25 * earnings = 1.25 * earnings.  In this case, your soloK match is obviously .25 * earnings

If you are a sole-proprietor, your net is 1.25 * earnings, but you get a 20% match.  .25 * 1.25 earnings = .25 earnings.

In either case, the maximum allowed soloK match amount is the same .25 * earnings.

And you can have employees as a proprietor too.


The way people "save on taxes" by incorporating is by paying themselves a lower salary than all of the profits of the business would be, thus avoiding some self-employment tax.  Essentially you go S-Corp.  Of course, this means your W-2 earnings are lower, so your 401K contributions would be lower too.  So you're avoiding 15.3% (at most - if you're over the social security limit, this number would be less) in self-employment taxes, but paying you are marginal income tax rate on 25% of those dollars that you could have sheltered in the 401K.  Break-even is at a 61.2% marginal tax rate or lower if you're over the SS limit, so you're likely saving on this year's taxes in net by doing this.  But you're also lowering future social security benefits, and depending on retirement / pre-retirement marginal tax rates, the benefits of tax-deferral as well.

dandarc

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Re: Advice on starting a service-based business?
« Reply #4 on: June 09, 2015, 09:54:47 AM »
The big reason people incorporate is to manage liability - in theory the corporation's assets are separate from your personal assets.  I say in theory, because in practice it may not do that good a job of protecting those personal assets.  E.G. - Business needs a loan?  You'll likely have to personally guarantee it.  Get sued?  Plaintiff will try and pierce the corporate veil, and if your LLC has no assets because you as the owner, operator, and only employee have been pulling all of the earnings out for years, they are more likely to succeed.

Liability concerns may or may not resonate with you - liability can also be managed with business insurance and so on.  And we're talking about a business where you edit documents at home.  Seems a lot less risky of an endeavor compared to say, operating a medical practice, or owning a bunch of real-estate, or doing contracting on other people's houses.

okits

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Re: Advice on starting a service-based business?
« Reply #5 on: June 09, 2015, 09:00:02 PM »
Hi Mary!  No advice on your actual topic but wanted to say it's nice to see you here (I also took a very long absence for family/health reasons).  Sorry you've been through so much, hope your health continues to improve (and that your new work set up goes great!)

Spondulix

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Re: Advice on starting a service-based business?
« Reply #6 on: June 09, 2015, 09:47:46 PM »
The costs of incorporating are steep (I think the yearly maintenance fee is close to $1k. For a sole proprietor: 0). I'd just start as a sole proprietor for a couple years until you gain a client base and decide it's really what you want to do.

One big thing to consider: you say that you don't want to take other people's orders, but when you're a contractor in a service-based industry, your job is fundamentally to do what everyone else wants you to. Your clients will ask you to do something you find stupid or that you disagree with. If you're unavailable when they need you or you are disagreeable, they'll eventually quit calling. It's not like a job where there's a process or warning before you're fired. Your livelihood will depend on whether your clients are happy with you and your work... and until you have enough clients/work to be sustainable, you may not have a lot of room to turn away work.

I think some people look at freelance as the way to be your own boss, but if anything, it's sort of the opposite. It's more like being an at-home employee except you are also handling sales, accounting, scheduling, etc in addition to your actual job - all while you have multiple bosses who don't know each other or what else you're working on. There's no security - If a client doesn't like you, they'll just move onto the next person. If someone does it cheaper, you could lose a client, too. You may have to work harder to create personal relationships (to retain the work). It's not like being in an office every day where you can just catch up with people periodically. If you're a contractor off-site, you have to be active at maintaining those relationships - in your free time.

If you get fired from a job, there's a level of protection you don't have as a contractor. If you interview for a new job and they call your past employer for info, chances are HR isn't going to mention that you got fired or what happened. They'll verify your dates of employment and likely leave it at that. If you screw up with a client, not only could you be fired, but people talk - especially if it's a small (or local) industry.

What are your options under disability? I'm curious if you could find a job that allowed you to work off-site part of the time. You might be covered from getting fired (and would get time off for disability instead)

(I've had my own service-based company for over 10 years, but go between jobs and being freelance. I love it, but it is a lot more work than it sounds like to be profitable.)

maryofdoom

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Re: Advice on starting a service-based business?
« Reply #7 on: June 10, 2015, 09:44:14 AM »
The costs of incorporating are steep (I think the yearly maintenance fee is close to $1k. For a sole proprietor: 0). I'd just start as a sole proprietor for a couple years until you gain a client base and decide it's really what you want to do.

One big thing to consider: you say that you don't want to take other people's orders, but when you're a contractor in a service-based industry, your job is fundamentally to do what everyone else wants you to. Your clients will ask you to do something you find stupid or that you disagree with. If you're unavailable when they need you or you are disagreeable, they'll eventually quit calling. It's not like a job where there's a process or warning before you're fired. Your livelihood will depend on whether your clients are happy with you and your work... and until you have enough clients/work to be sustainable, you may not have a lot of room to turn away work.

I think some people look at freelance as the way to be your own boss, but if anything, it's sort of the opposite. It's more like being an at-home employee except you are also handling sales, accounting, scheduling, etc in addition to your actual job - all while you have multiple bosses who don't know each other or what else you're working on. There's no security - If a client doesn't like you, they'll just move onto the next person. If someone does it cheaper, you could lose a client, too. You may have to work harder to create personal relationships (to retain the work). It's not like being in an office every day where you can just catch up with people periodically. If you're a contractor off-site, you have to be active at maintaining those relationships - in your free time.

If you get fired from a job, there's a level of protection you don't have as a contractor. If you interview for a new job and they call your past employer for info, chances are HR isn't going to mention that you got fired or what happened. They'll verify your dates of employment and likely leave it at that. If you screw up with a client, not only could you be fired, but people talk - especially if it's a small (or local) industry.

What are your options under disability? I'm curious if you could find a job that allowed you to work off-site part of the time. You might be covered from getting fired (and would get time off for disability instead)

(I've had my own service-based company for over 10 years, but go between jobs and being freelance. I love it, but it is a lot more work than it sounds like to be profitable.)

Thanks for your input - I really appreciate hearing from someone who's been on the other side of this.

I see your point about working for specific clients and having them be your bosses. I guess what I really hate - and this wasn't expressed very well in my original post - are those who dismiss my expertise for sexist reasons. I had a LOT of this in my past job; my opinions and knowledge were constantly dismissed because my bosses (a couple of old white dudes) thought they knew better than me (a comparatively younger woman). I can't point to any specific instances, but microaggressions add up over time until you get to full-on "bitch eating crackers" mode.

The clients for whom I've already worked have done very little of this to me. I work with mostly graduate students who speak English as a second language, and they are happy to benefit from my editing expertise with very little pushback on the changes that I make for them. Even with the book projects that I've worked and am working on (with full-fledged Big Fancy Professors of biological sciences), they are more than willing to concede that I know what I'm talking about when I make copy editing changes and put their work into the correct format.

I guess what I want is the ability to make all internal business decisions in the way that I want to make them, without answering to someone else. I want to provide a superior experience for my clients and customers, but I don't want to be told to spam them (and to be fired if I refuse to do so). I want to implement the marketing plan that I think is correct without asking for approval from someone else first. Maybe I just want to be in charge of my own life and work, and my health issues are bringing that to the forefront.

I don't have any real options for disability at the moment. I haven't yet met with the neurologist to find out what she thinks about my condition and if it's going to get worse or what we're going to do to treat it. Right now I'm really just in fact-finding mode, for both business and health purposes.