Need advice re: starting a company

[Freedom2016]

After 11 years with my consulting firm, I've finally had enough of the toxic environment and I've decided to leave. DH and I are not FI, but we have enough FU money to make it possible to leave without causing immediate financial distress.

So. Starting in 2016 I'll be a freelance consultant, picking up a bunch of 1099 work through other similar local companies. It occurred to me that I should open a solo 401k. Which led me to research the requirements for that – what kind of company do I have to be, e.g. sole proprietor, S-corp, LLC, etc. And then it occurred to me that I have enough industry experience (20 years) that I should be able to develop some of my own business in this space, not only act as a subcontractor to the other firms in my area. I’m not trying to “build” a business per se in the sense of eventually hiring employees; I mainly want a way to sell myself/my services effectively and not have to bring that work to a larger firm if I can avoid it. These various musings have led to a series of questions that I hope Mustachians can help me with:

1. I’m debating between acting as a Sole Proprietor and forming an LLC. The biggest difference between them, it seems, is the liability protection of the LLC. Which appears to come with a $500 annual cost in my state ($500 to register; $500/yr to file the required annual report.) If I went with sole proprietor and obtained an umbrella policy for DH and myself, would that accomplish the same thing as an LLC? What are the pros and cons here; what am I overlooking?

2. I probably need a website. I have started doing more writing recently, some of which is getting peoples’ attention – so I’d like to create a professional website where I can house my writing and blog away at will. I’ve had Fortune 50 clients, so I want it to look professional. Is there a Mustachian way to find someone who can create a high quality web presence? (I took a whack at updating my firm’s website several years ago, and let me say it wasn’t pretty. This is not a DIY project.)

3. Any advice on the best software to track my business cash flows – Quickbooks Self Employed, Freshbooks, Godaddy Bookkeeping, YNAB (?), an Excel spreadsheet, other? I want the ability to import receipts (w/ photos), generate/track invoices, make my taxes easy to do (estimate quarterly taxes, tag Schedule C deductions).

If there are other threads that address these sorts of questions, I'll gladly read them. My rudimentary search skills didn't turn up much.

[SwordGuy]

An insurance policy protects you up to the limit of the policy.

An LLC, if sued protects you because your assets are not its assets.

If you're planning to make good money, do both, but especially the LLC.

That's my 2 cents worth.

[thedayisbrave]

For a website, MVP you could start with a Weebly site.  I think mine was like a hundred bucks (including hosting and the domain).  I am pretty tech savvy but not nearly good enough to build a website-- a friend turned me onto Weebly and I love it! Very intuitive, you can create your own site and it looks fantastic.

[Rubic]

You really need to hire a CPA to assist you in setting up your new company.  They will guide you in making the correct decisions early on, and save you a lot of expense and hassle in the future.

[Freedom2016]

I have a CPA and will certainly consult him - thx for the reminder. My dad's also a corporate atty and can help. I figure Mustachians may also have some good thinking to add to the mix. :)

[Rubic]

I have a CPA and will certainly consult him - thx for the reminder. My dad's also a corporate atty and can help.

Cool, you're totally covered then.  From your initial post, it sounded like you were attempting this DYI.

[Mr. Green]

An insurance policy protects you up to the limit of the policy.

An LLC, if sued protects you because your assets are not its assets.

If you're planning to make good money, do both, but especially the LLC.

That's my 2 cents worth.

Definitely do your research. Just having an LLC doesn't protect you alone. If the LLC is just you and you sometimes pay for things from personal account, the lines between the LLC and you can be blurred enough that you may not be personally protected in a lawsuit. This is where consulting a professional comes in.

[protostache]

By itself a single-member LLC with one employee doesn't get you much that you can't get with just insurance. What it does get you is the ability to elect S-corp taxation, which lets you decide how much social security and medicare you're going to pay. You and your CPA can decide (with adequate written justification) what your "reasonable" salary will be (including cash and anything else that goes in box 1, including health insurance premiums), and then you only pay self-employment taxes on that amount. This will influence how much you can contribute to your solo 401k on the "employer" side.

There's a threshold above about $100k where the S-corp election makes sense. Below that, the additional cost to prepare your 1120S and K1 isn't worth it.

One interesting thing to note is that S-corp distributions above your reasonable salary are not subject to the ACA Medicare surtax (0.9% on net investment income and/or AGI above $250k) as long as a) you materially participate in the business and b) the IRS doesn't reclassify distributions as wages. Thus it's important to pay yourself enough on W2 to ward off IRS attention.

[argonaut_astronaut]

Second vote for LLC elected to be taxed as S-Corp. In my state, as long as you aren't in construction, you can file to be exempt from workers comp insurance as well.

[Freedom2016]

An insurance policy protects you up to the limit of the policy.

An LLC, if sued protects you because your assets are not its assets.

If you're planning to make good money, do both, but especially the LLC.

That's my 2 cents worth.

Definitely do your research. Just having an LLC doesn't protect you alone. If the LLC is just you and you sometimes pay for things from personal account, the lines between the LLC and you can be blurred enough that you may not be personally protected in a lawsuit. This is where consulting a professional comes in.

Good to know. I have a biz CC and biz checking account and about 90% of the time I am good at keeping biz and personal separate. I can ratchet that up to 100% separation if it gives me greater protection in the chance of a lawsuit.

Of course, I can't imagine what kind of lawsuit someone might file against me, but better safe than sorry!

[Axecleaver]

You should look at forming an LLC and opt for S-corp taxation, then pick up a Solo 401k. Tremendous tax advantages to this. There are some setup costs in the beginning, and a little extra time/expense for recordkeeping and separate tax returns for the corporate entity, which is the only disadvantage. Look into filing paperwork to be a woman-owned and/or minority owned business in your state, which may come with competitive advantages and/or tax advantages. Get a HDHP health insurance policy and an HSA.

In terms of expense tracking, take a look at Schedule C for the different types of business expenses you should track. Keep a travel log with source/destination and business purpose. Track your car mileage each year so you can document the % of business/personal usage. I keep everything in a spreadsheet, although I used Quickbooks in years past. Also look into liability and professional/E&O insurance. I pay about $2k a year for my company's policies (~$1m in coverage for each). All professional services (accounting, legal, subcontracting) are deductible.

Having started down the path you described 20 years ago, the one thing I would tell my younger self is to work harder on pipeline management - make sure you have multiple clients, some reliable, regular work and some higher-compensation, less reliable work.

[dandarc]

S-corp taxation isn't necessarily a panacea.  As others have mentioned, you can save FICA with an S-Corp.  Depending on the nature of your business and income, the limitation an S-Corp places on your Solo-K employer-side or SEP-IRA could out-weigh the FICA savings.

Remember, you only pay social security tax on up to $118,500.  Over that you're only paying Medicare.  So if a reasonable salary is 120K, you're only saving 2.9% in Medicare tax.  Whereas if you pay yourself more salary, you can defer 25% of every dollar as an employer contribution.  If you're in the 25% bracket, you'd save 6.25% of salary in taxes on that additional deferral.

So as always, it depends and run your own numbers.

[mozar]

I recommend Jimdo as a website builder.

[spokey doke]

Following...

Of the bujillion books on starting a small business (e.g. a small bakery), what recommendations do people have?

[elaine amj]

What about wordpress? It's got a lot of great functions built in. Our current company website is built on wordpress and most of the backend stuff is reasonably intuitive.

That said, my kids were working on a website for grade school and when I tried to teach them wordpress, they quickly got frustrated. My daughter then showed me weebly and I was very impressed with it. Very functional and intuitive.

So much better options these days :) I still remember my days with Dreamweaver and am kind of glad all of that is over.

[Freedom2016]

Thx for the Jimdo & Wordpress suggestions... I've flirted w/ Wordpress but gotten overwhelmed by it...

Meanwhile I found a site comparing Weebly, Jimdo, Wix, and Squarespace (http://www.websitebuilderexpert.com/wix-vs-weebly-vs-squarespace-vs-jimdo/) which has been a great starting point.

Also, talking to my CPA on Friday.

[Freedom2016]

Update:

I actually have a pretty cool business idea that I have decided to run with! I will continue to freelance as a subcontractor for other firms in the interim, but I've already created a draft website and I am soliciting quotes for helping me create a brand and build brand presence for this new biz. I'm going to incorporate as an S-Corp, and put myself and DH on payroll (he has sales experience!).


[PS - I changed my profile name b/c there's some potential for eventual recognition / google search results]

[skuzuker28]

Sounds like you are already going with an S-Corp, which is good.  Sounds like you also have the website under control.

For accounting, I'd check with your CPA but pretty much everyone uses QuickBooks.  Using what your tax preparer is familiar with will save on accounting fees.  As a tax preparer my self, I have this to add: DO NOT USE QUICKBOOKS ONLINE (unless you REALLY need remote access).  For the tax preparer the desktop version is much easier to use, and of course cheaper in the long run (one-time cost vs. ongoing monthly fee with QBO).

[Freedom2016]

Sounds like you are already going with an S-Corp, which is good.  Sounds like you also have the website under control.

For accounting, I'd check with your CPA but pretty much everyone uses QuickBooks.  Using what your tax preparer is familiar with will save on accounting fees.  As a tax preparer my self, I have this to add: DO NOT USE QUICKBOOKS ONLINE (unless you REALLY need remote access).  For the tax preparer the desktop version is much easier to use, and of course cheaper in the long run (one-time cost vs. ongoing monthly fee with QBO).

Oh, dangit! I was planning to use QB online b/c I have a Mac. What's the reasoning for not using the online version? As I understand it, the desktop version for Mac isn't great.

[skuzuker28]

Sounds like you are already going with an S-Corp, which is good.  Sounds like you also have the website under control.

For accounting, I'd check with your CPA but pretty much everyone uses QuickBooks.  Using what your tax preparer is familiar with will save on accounting fees.  As a tax preparer my self, I have this to add: DO NOT USE QUICKBOOKS ONLINE (unless you REALLY need remote access).  For the tax preparer the desktop version is much easier to use, and of course cheaper in the long run (one-time cost vs. ongoing monthly fee with QBO).

Oh, dangit! I was planning to use QB online b/c I have a Mac. What's the reasoning for not using the online version? As I understand it, the desktop version for Mac isn't great.

I will say this: QBO has gotten a lot better.  Not perfect, but better.  Here are the issues that I have with it, again from the perspective of the tax preparer:

1. Only one window can be open at a time.  When pulling information for reports, that means more time spent going back and forth between the Balance Sheet, P+L, plus the detail of those reports, and other reports we use to build our file and prepare the return.  This is doubly troublesome because it doesn't save the settings for the reports, so we need to customize them again every time.  On the desktop version you can keep multiple reports open and switch between windows.

2.  If I'm on QBO, I am in the client's actual working file.  While it is unlikely, there is a risk that I could alter client data.  Desktop version that isn't a problem: if something gets messed up I can just restore the backup again.  Honestly, this has never ACTUALLY happened to me (has to other though), and that risk just gives me the willies.

Again, that is just from my narrow perspective as the tax preparer.  In all other respects it sounds like it is wonderful: easy to use, easy to access.  However, it does cost more (~$20/mo vs. $200 for the desktop version that you can use for at least 3 years, longer if you don't do payroll in it) and it is obviously dependent on an internet connection.

Never used QB for Mac, so I can't speak regarding that.  However, I do have a couple clients who bought an inexpensive Windows laptop just for QuickBooks, as they were Mac people and wanted to do Accountant's Copies with us.