Consultant s Corner
Starting Your Business
The Legal Stuff
By Auri Rahimzadeh
Even if you re a subcontractor, there are many legal, financial, and marketing benefits to incorporating your business. Most importantly, incorporation provides limited liability, which means your personal assets (other than the assets you have invested in the corporation) are protected from liability to third parties. Second, an incorporated entity simply seems more legitimate. It will make it easier to land larger projects if you project an official and stable image. Perception can mean nearly everything when you deal with larger organizations. There are a multitude of bases you need to cover to get yourself properly incorporated. I m going to be somewhat general, so at the very least visit the Web sites I cite. And I strongly recommend you find an accountant and an attorney, as well.
I ve heard it time and again, I don t need to incorporate. The reasoning often goes something like, I just pay myself a 1099-MISC and have no liabilities like employees and such. This is unwise. If you re not incorporated, all your personal assets are at risk if you get sued for business-related matters. Incorporating properly and following certain corporate formalities protects your personal assets from your business liabilities. If you get sued, the worst that could happen is that you lose your business; at least you can prevent being plunged into personal financial ruin, as well.
It s easy to incorporate; simply contact your Secretary of State s office and register with them. In Indiana the filing fee is only $80! The forms are readily available, and many attorneys offer these kinds of services for a relatively small investment. You will also need to obtain a Federal Tax ID from the IRS, and many larger organizations you do business with will want your Tax ID. Yes, you can give them your social security number if you don t incorporate, but that makes you look like a small possibly unreliable shop.
There s another benefit to having all your business profits flow through your corporation: the tax rate is often much lower. Paying yourself as a contractor can push your taxes higher than 33%, but dividends from a business can be taxed at a much more digestible 18%. Still think incorporating isn t worth it? Of course, individual tax situations vary, so check with your accountant.
Make Friends with Your Government
State governments and the Federal government offer a multitude of free resources to answer your questions and help you run your business. Each has different requirements for forms and processes your business must be aware of. Make friends with your government entities, especially your Secretary of State and State and Federal tax departments. Their inner workings are often complex, but they will usually have people available to address your needs if you take the time to work with them. Of course, these free services are not a complete replacement for an accountant or an attorney, but it will keep you from having to pay someone else for every business issue that arises.
Pay Attention to Filing Requirements!
Once you take the formal step of filing incorporation papers, you must follow some additional processes. These vary from state to state, but generally include:
- Filing yearly or bi-yearly entity reports.
- Filing wage reports, even if you have no employees.
- Filing your taxes properly.
- Keeping corporate minutes and other records.
A corporation is a separate legal entity. If you don t respect the separate legal existence of your corporation, neither will the law. You can lose the liability limitations the corporation would otherwise give you. This is called piercing the corporate veil, and complying with corporate formalities is one important way to help prevent it.
Hire an Attorney
You will need an attorney, or at the very least to consult a Web site like http://LegalZoom.com or http://NoloLaw.com, to draft the following documents for you (at a bare minimum; requirements may vary from state to state, so make sure you ask your Secretary of State or other authoritative source which other documents must be in your corporate books):
- Articles of Incorporation
- Corporate Bylaws
- Corporate Minutes
- Federal Tax Forms
- Annual or Biennial State Filings
You should also develop a relationship with a qualified corporate attorney. As your business grows, so does your need for an attorney, and they will be better able to meet your legal needs with an increased understanding of your operations.
Getting Your Corporate Books in Order
You should keep your collection of documents, including your State and Federal Tax ID documents, Articles of Incorporation, etc., in one place. This is often called a Corporate Minute Book. Web sites such as http://BizFilings.com, http://CorpKit.com, and http://MinuteBook.com affordably provide Minute Book Kits to help you keep all these documents organized. They come in both plain and fancy bindings. The kits contain most of the basics, plus a few other important items, such as Corporate Resolutions, Transfer of Stock certificates, and even a cool official embossed corporate seal.
Separate Your Finances
When your business is paid by a client, you must keep that income in a separate bank account. Remember that piercing the corporate veil I discussed earlier? Well, it s a big no-no to mix your business and personal finances. Treat them as completely separate entities. The best bet is to have your personal and business accounts at separate banks. Business checking and savings accounts are easy to open, although they usually have fees associated with them if your balances are small. Call the bank ahead of time to know which documents you should bring with you when opening an account at a minimum they ll likely need the State Tax ID and Federal Tax ID certificates.
Hire an Accountant
Unless you re a CPA (Certified Public Accountant) by trade which is unlikely because you re reading a development magazine instead of a spreadsheet you need an accountant. A good CPA knows the ins and outs of keeping all your finances in order, and can handle your taxes at the end of the year more effectively because they know your books. Accountants also can suggest ways for you to save money, invest, grow your business, and more all while saving your business money.
You Need Insurance
There is no excuse for going without business insurance, whether you decide to incorporate or decide to remain a sole proprietor or unincorporated partnership. You never know when you ll find yourself needing protection, such as from property damage after a heavy storm, or from legal liabilities from a rotten contractor. Your clients may even require you to carry certain types of insurance before they ll let you start a project. Talk to a qualified insurance agent who can help you obtain the appropriate coverage.
At the very least, you ll want business general liability insurance, often called commercial general liability or CGL. However, in the software business, you need better protection. This comes in the form of Errors and Omissions insurance, which the insurance industry calls E&O coverage. Because E&O insurance usually covers defects in your code and, to a certain extent, the damage those defects may cause, this coverage will cost more than your basic CGL coverage.
If you work with a lot of Web sites, or even content authored by others, you may also want Trademark and Copyright (sometimes called Intellectual Property ) insurance to protect you from lawsuits arising out of the use of media elements you don t own. You also can mitigate this exposure by having all your clients sign a Consulting Services Agreement that outlines their liability for any media assets they provide you although you would still be on the hook for any media assets you use for which you don t have rights. To be safe, make sure you always have permission to use the media you use in your projects, regardless of whether you feel it should be free. In lieu of a Consulting Services Agreement, any engagement letter or statement of work should have a clause stating the client represents they have permission to use all content on the site, and that they hold you harmless from any liability arising out of its use. Be sure your attorney reviews or drafts this language for you.
Incorporating your business gives you many benefits and, done properly, should yield a higher payout to you while protecting your personal assets. You also will likely gain the ability to lure bigger fish, who often require businesses to be incorporated and have policies against working with individual contractors.
While getting started and staying on top of the bureaucratic requirements may seem daunting, it s actually all pretty easy, with lots of Web sites, government agencies, attorneys, and accountants to help you along the way. As your business grows, these tasks will actually become more transparent. Get started today!
I m excited about this series, and I want to make sure I m addressing your needs. If there s a topic you would like me to cover, or you simply have questions, please don t hesitate to e-mail me at [email protected].
Auri Rahimzadeh is President and Senior Engineer at TAG (The Auri Group, LLC, http://www.aurigroup.com), a Microsoft Gold Certified Partner based in Indianapolis, IN. Rahimzadeh has authored three books, including Hacking the PSP and Geek My Ride. He has been technical editor on Wrox and Wiley titles, and has written a number of technical articles ranging from .NET development to consumer electronics. Auri started his technology career working for Steve Wozniak, co-founder of Apple Computer, and enjoys writing and teaching others about all sorts of technology.