Ask HN: Need advice for starting freelance biz and eventual startup life.

https://news.ycombinator.com/item?id=1451819

by precise • 16 years ago

40 34 16 years ago

news.ycombinator.com

[Note: I'm using a throwaway account for anonymity]

I'm currently working at a small development agency and things are looking grim. It looks like the company may have 2 to 3 more months before it goes under (due to circumstances outside of my control. Poor business decisions.)

In my off-time I've been working to develop a few freelance connections and have lined up several projects for the next few months. Until now freelancing has been just a way to supplement my (low) income from my development job, but I would like to switch over to freelancing fulltime and eventually work on my own application. While I'm not generating enough freelance income to live yet, I'm confident that if I was focusing full-time I could.

I'm sure this has been asked several times in the past, but what should my next steps be? I haven't set up any formal business for myself. Is an LLC the best bet for a freelancer who wants to release an app eventually?

mbenjaminsmith• 16 years ago

Assuming you're in the US, it doesn't take any paperwork to do business as a sole proprietorship. You and your business are legally the same, you have unlimited liability (unlikely to be an issue for you) and you pay taxes the same way you do now.

Read as, spend all of your energy finding income-generating projects at this point. You're safe as you won't run into any tax issues down the road you forgot to prepare for.

kls2• 16 years ago

no you pay 15.3% more taxes on your salary. This is you a portion of your taxes that your employee and now you will be responsible for. As well, never do business under your own personal liability, while software is low risk, if you get into a litigious contract dispute you could loose everything. You want to limit your liability and you want to form a S-Corp. Go to an accountant or attorney, not doing this correctly could be a costly mistake, if you truly can't afford one then educate yourself and file online for $50 bucks or whatever they charge now.

precise4• 16 years ago

This is exactly the type of advice I'm looking for. Does anyone have any easy to understand/comprehend resource that lays out step by step what I should be doing? Maybe that just doesn't exist. I am located in the US.

mgkimsal2• 16 years ago

It's generally going to be a few hundred bucks if you have someone else do it for you, or minimally > $100 for DIY in most states (NC is $125, plus $200/year renewal fee).

You don't pay "15.3% more taxes". 15.3ish percent from income is taxed for FICA (social security, etc). You pay roughly half of that 7.x% in traditional employment situations, and the employer pays the other half. Someone making $100k is actually costing the employer $107.6k (roughly).

As a sole prop you pay both halves of this tax - that's where the 15.3% comes from. However, you deduct half of it when computing the rest of your income taxes.

Long and short - talk to a tax person about how you this is handled. It's not hard, but taking an hour or so to get your head around it is advisable.

As to scorp/llc/ccorp, etc... Two points. One, for a single person there likely won't be any major diff between scorp or llc except more paperwork as an scorp. You can elect to be taxed as an scorp while retaining LLC status, but I don't know many who do that. Also, the arguable tax advantages of scorps are likely being reduced or eliminated soon via impending legislation in the US, so don't choose that for tax reasons. There may be some other reasons re: shareholders and such, but you can always 'trade up' to a larger corp at some point if you need to.

I do some work with agencies who can get work with me as a sole prop, but if I work under the LLC name, they have to go through a full public bidding process, which a) takes longer, b) increases the chance I might not get the work and c) generally adds more cost to the project all around. So, even though I have an LLC, I still do some work 'outside' of that structure, depending on the situation.

klous• 16 years ago

IANAL: If you just want some personal liability protection, an LLC is a good move. Also, you should have a business checking account and do not co-mingle funds to maintain the separation. If you plan on having investors in your company, you'd probably want to consider a corporation at that point. For more information, checkout the Nolo resources online, at your library, or on Amazon. http://www.nolo.com/legal-encyclopedia/faqEditorial-29070.ht...

felideon3• 16 years ago

IANAL/IANAA: I believe an S-Corp is cheaper to set up and should work well for your consulting/contracting business.

You could then incorporate a separate LLC whenever you're ready to work on an actual product and are planning to raise money from investors.

jey• 16 years ago

LLCs are easier. You can file a petition to request your LLC to be taxed as an S-corp if needed.

felideon3• 16 years ago

I think I meant cheaper, or got confused for a minute. But that's interesting, I didn't know your LLC could be taxed as an S-Corp.

andreshb• 16 years ago

1. Create an LLC (not sure in what state you are, but in florida it takes about 10 minutes, it's an online form)

2. With step 1, you can get a Business Checking account (some banks have free, I've used chase)

3. Get an account on freshbooks for your billing (invoicing, bookkeeping, accounting -- it will help when taxes comes around and in general to keep track of the financial health of your company)

I highly recommend you do freelance with your LLC in case you start signing contracts and there is a dispute, they'll go after the LLC, not after your personal assets.

Some things can be logged as business expenses, and some as personal expenses, just use common sense, and do talk to an accountant when you have to file taxes. The LLC itself does not pay taxes, you pay the taxes as income when the money goes from your LLC to you.

About explains it better:

"The tax implications of an LLC differ from those of corporations. LLCs use "pass-through taxation," which means the LLC does not pay taxes. Income from the business is instead passed down to the company's owners, who are called members in LLCs. They claim the profits or losses on their personal tax forms." http://sbinformation.about.com/od/ownership1/a/llctax.htm

IANAL

mburnett2• 16 years ago

Be sure to setup that business bank account quickly. It can take a few weeks to get everything in order. I believe you can do it as long as you have your Employer Identification Number (EIN).

https://sa1.www4.irs.gov/modiein/individual/index.jsp

This means you can do get the bank account and apply for the LLC in parallel.

midnightmonster3• 16 years ago

In Florida for me, both the biz bank account and the llc were extremely fast. Llc was an online form with instant results, and biz bank account just required a visit to the actual office of my credit union. I needed the llc first in order to get the bank account in that name.

phsr• 16 years ago

Would you recommend creating an LLC for part time freelancing as well? I have a full time job, but planning to freelance to supplement income. I know, YANAL

jtbigwoo2• 16 years ago

> I highly recommend you do freelance with your LLC in case you start signing contracts and there is a dispute, they'll go after the LLC, not after your personal assets.

We should be careful not to overstate the protection a corporation gives. In a one-owner LLC or S-corporation, especially when the owner is the sole employee, you're still personally liable for most screw-ups and disputes. You made the mistake, signed the contract, etc. and the courts often find that both the company and the company's agent (you) are responsible. In addition, most banks will want the owner of a small company to personally guarantee any large loans. The big benefit to incorporating is that you can pay yourself a salary and lessen your tax liabilities.

mburnett2• 16 years ago

Just remember that if you create an LLC (in any state), but operate that LLC primarily in California, you are required to pay this ridiculous "tax" of $800 per year (due within 90 days of when you first setup shop).

http://nolonow.nolo.com/noe/popup/NNLLCCABAS_faq.html#topic5

Also, I setup my LLC by just filing a few government forms instead of something like LegalZoom and it wasn't much trouble at all.

gte910h• 16 years ago

Create an LLC

Get a forwarding number now (google voice, twilo, etc)

File for a business checking account

File your taxes as an S Corp (there is a form with the IRS, you only have a certain number of days after you start doing business to do this).

California is expensive to do an LLC. Nevada, Delaware and Georgia are much less so.

Here is an old blog I did about when I setup the company I now do product development through (although I work with other people, you sound like you're going solo).

It goes through the steps of setting up your business, etc (but is slanted heavily towards Georgia): http://www.rowdylabs.com/blogs/pitchtothegods/archives/2006_...

I suggest Google Checkout/Zoho Invoice for invoicing.

I suggest cash method of accounting (accrual method is a LOT of paperwork and its a pain to switch to cash later, but not hard to switch to accrual later).

midnightmonster3• 16 years ago

I've been in a similar place. When my wife lost her job a couple years ago and we lost our housing (came and went with the job), I went full-time with my freelance work and became our sole income.

Think of the business entity as a form of insurance. You have to go through some hassle to set it up, and you have to maintain it at a minimal financial cost and possibly more significant paperwork time cost. If properly maintained it provides some legal protection of your personal assets if you are sued, but less than you'd think for a freelancing business. You decide whether it's worth the bother. I went ahead and did the LLC--it just seemed like a good idea to me, and it helps my brain a bit to have a separate legal entity for the business. When you get ready to actually release software, you may want to have a lawyer help you revisit your decision, whatever it was.

A separate business bank account is essential regardless of your organization you will need an EIN from the IRS. Just google for how to get one. It's free.

I use fresh books but have not found it to be really adequate for forming a solid financial picture. I'm currently using a beta version of gnu cash, but it won't be just right until I get around to enhancing it with some reports of my own.

Your tax situation will change. You will have no withholding, so you'll need to make quarterly payments. IRS interest charges are not out of line, but they can really add up over the year if you don't pay attention to this at all. Google "estimated payments safe harbor". Of course you're also going to be responsible for self-employment tax, which looks like it will be considerably more than my income tax this year. Use the google for calculators to estimate both so you know how much to be saving along the way.

Good luck, and ping me via letterblock.com if you want.

JangoSteve• 16 years ago

While I'm not generating enough freelance income to live yet, I'm confident that if I was focusing full-time I could.

What exactly would you do differently working full-time that you can't do now while still at your job?

I ask because I thought the same thing when I first considered quitting my full-time engineering job to freelance. But then I came to the conclusion that it was just a justification that would allow me to immediately do what I wanted (quit) while putting off the tedious part (find more freelance work).

In the end, I chose to be a bit more prudent, and actually line up enough work to comfortable quit without worrying too much. So I went out and found enough work that would allow me to make as much as I was making at my full-time job for at least 3 months (noting that my rate was significantly higher, so it only amounted to finding about 25hr/wk of work for 12 weeks). Even then, I was still nervous as hell when it came time to give my 2-weeks notice.

By far the easiest way I found to line up a solid 3-months of freelance work before I was actually doing things full-time, was to find a full-time development firm and work out a subcontracting agreement with them.

precise4• 16 years ago

I've had steady work for the past few months and I'm working with other design firms/agencies that seem to have a steady flow of work. They're impressed with what I do and I'm having to turn down work because I don't have time to complete it. I realize that I need to put away a nice amount to be ready for dry periods, but I have that.

To answer your question, I could spend more time freelancing than I can while still at my current job.

midnightmonster3• 16 years ago

If you're having to turn down work at a comfortably livable pay rate (considering additional taxes, health insurance, etc.) for lack of time, and this is an ongoing situation, not a one time fluke, then I agree it's likely you'll be able to do just fine going freelance full time. And if your current job is approaching the end of the line, it's probably a good time to make that jump. Not worth all the energy you'd have to invest in finding another job and getting up to speed only to quit N months later.

mjfern• 16 years ago

Pick up a copy of "Working for Yourself: Law and Taxes for Independent Contractors, Freelancers and Consultants." It's an excellent book that provides detail on legal forms (LLC, S-Corp, etc), tax issues, insurance, record keeping, client agreements, etc. I highly recommend the book for someone just getting started as a freelancer.

MicahWedemeyer3• 16 years ago

I'd recommend finding an accountant (ask other local freelancers for references) and have them handle all the business incorporation issues (LLC vs S-corp, payroll taxes, etc, etc). It will cost more than doing it yourself, but they may end up saving you money, and you'll definitely sleep a little better.

No offense to anyone in particular, but beware the legal/accounting advice you receive here on HN. Just like you shouldn't ask an accountant for programming advice, it's not a great idea to take accounting advice from a programmer. Pay an accountant to handle things, at least at first. Have them teach you how to handle payroll taxes and quarterly filings and all that stuff. You may find it's easy enough that you can do it on your own. Or, you may find that it's complicated and you're glad to have an accountant handle it.

precise4• 16 years ago

What should I expect this to cost?

MicahWedemeyer3• 16 years ago

Honestly, I don't know. I think it varies between accountants.

My accountant charged me $500 to handle everything related to creating an S-Corp. That included the $150 or so in fees that went to the state, so he ended up keeping $350. I consider it money well spent.

For the record, I live in Atlanta, Georgia. I'm not sure how much it costs to do the filings in other states.

pasbesoin• 16 years ago

While taking this approach, does it make sense to read and familiarize oneself, to the level of layperson, in advance, to the extent possible? The purpose being to make those meetings as efficient as possible and maximize knowledge transfer.

If so, does anyone recommend particular resources?

My biggest concern is liability. I don't want any more potential attachment to present and future personal assets than necessary.

EDIT: I'm seeing some references/recommendations in the other comments. So thanks, and sorry if my query begged repetition.

MicahWedemeyer3• 16 years ago

Educate yourself, sure. But don't get any ideas about how much you know. When you do meet with an accountant, go in with ears open and mouth shut. You probably don't know half as much as you think you do. Plus, their knowledge is what you're paying for. If you don't utilize that, you're not getting your money's worth.

Finally, it's probably a good idea to at least get a cursory second opinion. From what I've seen, accountants are a lot like programmers. Where one is adamantly behind Ruby on Rails, another will recommend PHP. There probably is no single right answer, but it never hurts to hear opposing viewpoints.

hotmind• 16 years ago

My advice is to not go LLC until you fully understand what you're doing and why you need it.

Also, when you incorporate, get close and personal with an accountant.

Your next step would be to get some business cards printed out and start beating on the doors of local business owners. The conversations you have with them will be very informative and point you in the direction you need to go (and hopefully get you some clients).

Best of luck to you.

jtbigwoo2• 16 years ago

Lots of good advice about corporations and I thought I'd throw in my two cents about finances.

- Find a CPA and a lawyer you can work with. Choose supporting professionals that match your risk tolerance. The self-employed can be very aggressive regarding taxes, litigation, and financial engineering (and likewise accept more risk of audits and penalties.) If you want to be aggressive, choose an aggressive CPA and an aggressive lawyer. If you're more conservative, do the opposite. Don't expect that a professional will be conservative just because she works for a larger firm. In fact, the opposite is often the case.

- Get a business checking account and a business credit card. Many banks offer free checking and no fee credit cards to small businesses. Try to be good about using the business accounts only for business expenses and you'll be much better off at tax time.

- Open a high-yield money market or savings account. Don't let your cash sit around in the checking account. Even with today's crappy interest rates, you can make a few bucks each month. Your bank might have good rates or you can look at Everbank or Capital One. (Costco members get a rate bonus at Capital One.)

- Set up a retirement plan. A solo 401(k) or SEP-IRA is simple to set up and you can save a ton of money for retirement and help save on your taxes. A solo 401(k) lets you contribute the most (up to $49,000/year,) but it's a more of a pain to maintain, especially if you plan to have employees. Talk to your CPA about which is right for you. T. Rowe Price, Vanguard, and many of the other big financial firms offer cheap or low-cost small business retirement accounts.

- Talk to a CPA and ask them to explain how to pay yourself a regular salary, withhold taxes, withhold retirement contributions, etc. Actually doing the payroll yourself is not hard, but there are plenty of companies that will administer your payroll for $30 - 60/month if you don't want to do it.

- The more clients and expenses you have, the more you need some sort of accounting package. If you have one or two clients and few expenses, a spreadsheet is probably fine for bookkeeping. If you have more clients or lots of purchases and expenses, a simple accounting program will help a ton.

alexwyser• 16 years ago

Hi. I am a freelance web designer. I am starting a distributed web design firm. Basically its a couple of freelancers, who are collaborating together so everyone can benefit from everyone else's skills and local reach.

If you are interested then email me at alexwyser@gmail.com

Ask HN: Need advice for starting freelance biz and eventual startup life.

Related Stories