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July 04, 2005
Freelancing vs incorporation from Archinect
Total Entries: 41
Total Comments: 148
05/01/05 12:16
I'm leaving my 9-5 and going solo. Do any of you have good advice on whether it's best to work as a freelancer or to incorporate as a firm in this situation (i've heard that "S Corp" is what you should do if you're an individual operating as a business.) Mostly wondering about things like taxation/accounting & that sort of responsibility. I thought it might be better/be taken more seriously, etc. to present myself as the principal of a firm rather than a freelancer, or at least to have the option of doing either depending on the situation. Most of the information I've found about incorporation is written in terms of benefits/disadvantages of each type of incorporation to shareholders, which isn't an issue.
TED
Total Entries: 54
Total Comments: 997
05/01/05 12:45
SS, is it architecture or design? in ILL you set up a business as sole proprietor or partnership[individuals taxed], s-corp, c-corp[big generally like HOK], LLc for example. most small arch practice are S in chicago although newly formed companies are going for the LLC/LLP which gives you the taxation benifit of sole prop/part and the liability benifets of a corp. in ill, i think there is a $500 filing fee anually for llc.
in ill, if you are a S-corp arch practice, 2/3rd of the shareholders must be licensed architects/engineers. so you should look into the licensing requirement if you are going to practice architecture as a firm. i think as a LLc, all shareholders must be licensed. the name you use also is an issue. if you use something else 'susan surface architects' and working as a sole proprietor [such as SS Arch] you have to register that name with the local licensing board [assumed name]
as a new practice, as long at the end of the year you dispearse money out of your business bank account, you wont pay corp income tax. now as a sole propieter, you can do 401k plans etc.
as obvious as it sounds you should find an accountant who works in with the professional group and set out a business plan for their recommendation. how many employees [if any]. even if you start small as a sole proprietor, say 2 years, you can switch when the money really starts to flow. if you are going to work out of your appartment/house there are certainly tax advantages there that i am not certain you get when you go corp. perhaps you do.
just make certain you run seperate bank accounts / credit cards for both-
there are great inexpensive programs out there like quickbooks which can do your payroll taxes, quarterly reports etc. for a monthly fee in addtion to billing, etc.
R.A. Rudolph
Total Entries: 12
Total Comments: 341
05/01/05 13:20
We started out with a general partnership and now have both a general partnership and a corporation, mostly for insurance purposes (the corporation is a construction company), as well as liability for debts.
I have done a lot of reading about this and asked our accountant tons of questions and I still don't fully understand the benefits and differences but it partly depends on what state you are in and what your business will be doing. My understanding for small companies that don't have a huge cashflow(like maybe $500,000/yr) is that there is not much tax benefit to incorporating, and in fact it may be a liability (because, for example, in california S corporations must pay a minimum of $800/yr, even though the profits flow through to the shareholders and are taxed like a partnership). There is a slight benefit in that you can pay yourself a salary and take the rest as a bonus on which you don't have to pay social security - but whether it's worth it would depend on how much money you expect to be making and I would talk to an accountant who works with small businesses about it.
The benefits to incorporation or forming an LLC, as opposed to a partnership or sole proprietorship, relate to liability for debts. If you are planning to practice architecture with a license, in california you cannot form an LLC, and a corporation will protect you from debts to vendors (such as things you would have bought on a credit card), but it will not protect you from professional negligence (if you are sued for something relating to professional practice).
If you are not practicing architecture though, incorporating may also protect you from being sued for the work you do - but this is unclear even to my many lawyer friends (you'll need to talk to someone who specializes in exactly what you do it you're concerned about that). However, I've also learned from dealing with unhappy clients and discussing it with said lawyer friends, that the chance of getting sued over small jobs, especially if you have good contracts, is extremely slim.
Incorporating involves some cash (maybe $1,000), possibly a minimum tax payment per year and more paperwork (so more accounting $). Unless you will be purchasing lots of supplies with credit cards and/or loans that you would not be able to pay off if your company failed, and/or you are doing something that is highly risky (working with very litigious clients for high fees, for example), than I would probably say just go for a sole proprietorship for now. It's much easier (if you use your name you don't even need to file for a ficticious business name or a taxpayer ID) and will cost you less in the long run, and I think you'll still get the same tax benefits for the most part. But as Ted said, definitely open a separate bank account and keep very good records of your expenses so that you can deduct the maximum, and find an accountant - it's well worht the $$.
Also, just a tip - I use quickbooks but find it very complicated, so if you're going to use accounting software unless you're really willing to take a plunge I would recommend quicken or something with a few less features that costs less.
Good luck!
Susan Surface
Total Entries: 41
Total Comments: 148
05/01/05 15:47
I'm a graphic designer & illustrator.. have some exhibition design & retail display clients also, but nothing that requires licensing.
e
Total Entries: 27
Total Comments: 1040
05/01/05 16:28
ss, i left frog 4 years ago. i do mainly print, digital, illustration, and branding. i would recommend doing a sole proprietor. this was also the recommendation of my accountant. there isn't a hell of a lot of liability in what you do and it just keeps taxes and everything a hell of a lot simplier. if you take it seriously, your clients will do the same. i don't believe they care what you are as long as you deliver quality on time.
Susan Surface
Total Entries: 41
Total Comments: 148
05/02/05 0:09
Is there a problem with changing the name you choose as a sole proprietorship if the structure changes - i.e. addition of collaborators or employees. Sometimes it is OK to put an individual's name on something, but in some situations anonymity, collectivity, or ambiguity can be advantageous. My current firm's prospective clients who just find the site see the website think the firm is much bigger than 5 people because of the well known brands in the portfolio. And then they hire us anyway because after seeing the portfolio it occurs to them that they don't *need* a large company to do their project after all.
Another reason I am hesitant to incorporate my name is that it can be annoying or cheesy. People think I am associated with *Surface magazine or have given myself a pretentious faux name, but it's my real birth name. Fie.
Is there any legal problem with titling & marketing yourself with a firm name but the clients still have to write checks to an individual? Or is it just an issue of some other business being able to register the firm name first?
trace
Total Entries: 8
Total Comments: 539
05/02/05 6:05
Go with the LLC. It's easy and cheap.
Advantage: Transparent taxation. The moneys 'flow' through from the client to the individual, thereby bypassing any taxation at the company level. It's also about as simple as it can be, no board of directors, share holders, etc., etc. It gives you protection without complications.
It's the latest and greatest. It was made for small businesses and it works. Also, you don't have to put the ugle 'LLC' after your name, it's not required.
S Corps require shareholder meetings, documention of the meetings, shares, etc., etc. You aren't taxed twice, but it's a pain in the butt if it's just a few people.
Corps are taxed twice, once at the corporate level, once at the individual level.
General Partnerships seem damn scary to me. No protection and both parties are liable for everything.
I paid $750 to have a lawyer set up our first LLC, with 2 more to follow.
trace
Total Entries: 8
Total Comments: 539
05/02/05 6:08
e - not sure if my lawyer would agree that there isn't a lot of liability (or a potentially huge hassle, at least). His example was that if a client needed a rendering for a huge presenation and it wasn't delivered, and he lost tons of money because of it, he could sue me. I know graphics cannot directly cause any kind of injury, etc., but non performance can be reason to sue.
But then again, he's a lawyer.
R.A. Rudolph
Total Entries: 12
Total Comments: 341
05/02/05 9:28
trace - i agree that the general partnership is scary - only alternative here is to incorporate, which is a pain, and if you don't maintain scrupulous records you're setting yourself up if you are sued anyway because they can "pierce the corporate veil".
all in all though, i don't think you will be sued unless VERY large amounts of money are involved, because it is tens of thousands of dollars to even get to court, let alone try a case, and potentially everyone loses.
susan - you can be a sole proprietor with a company name, you file for a ficticious business name (with your local city, county, depends on area). i don't think you need a taxpayer ID regardless - but if you go to the bank and find out what you need to open a separate account for the business they will let you know. that way you can have people write checks to the business rather than yourself. i personally think people feel we are more professional if they write checks to the company. we have also had no problem getting credit cards in the company name, which has helped tremendously with cash flow and with record keeping - it also establishes credit for the company which you may want further down the road.
If you want to add extra owners further down the road, you would need to change the structure, but it's much easier to go from sole proprietor to something more complicated than to start with a one shareholder corporation and add new shareholders... and if you add employees or colaborate with people who are not part owners, it doesn't make a difference what kind of company you have set up (except in terms of liability - if you have more than a few employees i would probbaly incorporate)
trace
Total Entries: 8
Total Comments: 539
05/02/05 10:47
RAR - the LLC was not an option for you? I am curious about the limitations, as our lawyer and a colleague recommended the LLC for our archtiecture practice as well.
R.A. Rudolph
Total Entries: 12
Total Comments: 341
05/02/05 11:58
nope, in california you cannot have an LLC if you are a licensed professional - doctor, lawyer, architect & accountant, i think... oh, contractor as well actually. they have set up the LLP for the professionals, which protects you from your partners' work (& maybe debts, not sure about that), but you are still personally liable for professional practice - only insurance will protect you.
Posted by byandrew at July 4, 2005 11:56 AM