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Off Topic: Business Classification

jjamesjjames Just another dudePosts: 2,905
Just curious for all you independent programmers, did you go sole proprietor, LLC, Corp, etc? I'm curious as to what type of "protection" a programmer needs. I'll assume that everyone that responds that is clearly an IP - that all you do is code and don't handle any real "goods" or do any install. If you do - let us know. :D

Comments

  • HARMAN_icraigieHARMAN_icraigie Technical Trainer II, Harman Professional University Posts: 580
    s-corporation
  • ericmedleyericmedley Senior Member - 4000+ posts Posts: 4,177
    I've always been a sole proprietorship when I was totally self-employed. I toyed with forming an LLC for a while but the tax advantages for royalty income were better as a sole proprietorship in my case. I carried liablilty insurance for the weaknesses involved with not being an LLC or S-Corp. My other dealings were non-profit corps or LLC.

    You're not getting any fancy ideas, are you? :D
  • jjamesjjames Just another dude Posts: 2,905
    ericmedley wrote: »
    I've always been a sole proprietorship when I was totally self-employed. I toyed with forming an LLC for a while but the tax advantages for royalty income were better as a sole proprietorship in my case. I carried liablilty insurance for the weaknesses involved with not being an LLC or S-Corp. My other dealings were non-profit corps or LLC.

    You're not getting any fancy ideas, are you? :D

    Hmm - that seems to be an option (carrying liability insurance.) I didn't think about that.

    And since you're asking about my fancy ideas (which they're not THAT fancy), I just put the house up for sale last Wednesday and we plan on moving back to Michigan once we sell it. Then from there, going the route of an independent programmer. I'm just concerned about how much "protection" I'd need. I'm not concerned about the completion part, but more of "well your programming caused this huge cluster" and damaging some equipment or the house (depending what's involved.) Plus - I really don't want to deal with the hassle of running a "business" per se, but still want to be protected somehow.

    Perhaps the liability insurance will be the way to go. Thoughts anyone?
  • ericmedleyericmedley Senior Member - 4000+ posts Posts: 4,177
    jjames wrote: »
    Hmm - that seems to be an option (carrying liability insurance.) I didn't think about that.

    And since you're asking about my fancy ideas (which they're not THAT fancy), I just put the house up for sale last Wednesday and we plan on moving back to Michigan once we sell it. Then from there, going the route of an independent programmer. I'm just concerned about how much "protection" I'd need. I'm not concerned about the completion part, but more of "well your programming caused this huge cluster" and damaging some equipment or the house (depending what's involved.) Plus - I really don't want to deal with the hassle of running a "business" per se, but still want to be protected somehow.

    Perhaps the liability insurance will be the way to go. Thoughts anyone?

    Well, your business identity is more a matter of overall liability, not specific. There is a myth that forming a corporation protects your home/property from a law suit. That is not totally true. That myth is further propogated by the 'we'll set you up as an LLC' radio adds.

    When you, as a corporation are sued, your assests are still in play if a law suit gets filed. After all, if your corp owes a bunch of money, that money has to come from somewhere. A corporation just makes it a bit harder to get to, that's all.

    If I were to strike out on my own as a programmer-for-hire right now, I"d probably do an LLC myself. I'd make my wife an officer and probably one of her relatives the other officer.

    Sole proprietorship works well if you're sure it's just you and your laptop. (so-to-speak) No partners and you're doing strictly paid-by-the-hour or flat-fee kind of stuff. You just have to file the C schedule at tax time and it's nice and easy.

    I still run my music production business as a sole proprietor.

    On the insurance issue: I'd have it either way. It's not that expensive and it keeps you out of trouble financially if things do go haywire. I got mine as a kind of generla package deal fro all my stuff. I do have quite a bit of audio/studio equipment that I need insuranced and also a building for the studio on my property. So, I shopped around and got a whole package for general business insurance that also carries up to $1M in liability for on property and $250,000 for off property. I never let anyone come into the studio anyway, so that part is not really a need for me.

    My experience ends there since I've never been actually sued. So, my shields have never stood the test of full-phasers...
  • Spire_JeffSpire_Jeff Formerly Caffeinated Programmer Posts: 1,917
    First, let me preface this by saying that you should consult a lawyer for actual advice on this and anything I say is NOT legal advice as I am not a lawyer :)

    I have heard that if you do not follow certain rules and practices, LLC and INC are not any safer than sole proprietor as it can be argued that you are really a sole proprietor (or something like that). I have had businesses where I was a sole proprietor and I have also incorporated, but in both businesses I carried liability insurance. It really wasn't that expensive and it just made me and my clients feel more comfortable. It actually helped me get jobs when I was competing with others because telling a client that you carry $3 million in liability insurance makes you seem professional or something. In all of that time, I never once screwed up to the point of needing to make a claim, but I also never was so focused on making a mistake that I caused the mistake to occur :) (Remember, there is no spoon, and would Neo have broken the vase had the oracle not mentioned it ;) )

    Just some food for thought.

    Jeff
  • KennyKenny Junior Member Posts: 209
    I'm set up as Sole Proprietor with $2M liability insurance. The insurance coverage was asked for by one dealer just to cover his and my rearends. It's cheap and is worth every penny if I ever need it.
    Plus like Jeff said, it makes you look more professional.
    If you have employees then the way to go would be an S Corp or an LLC, you need to look at what your needs are. Obviously you can't be a Sole P if you have employees. If you see yourself needing help you could always farm it out other independent programmers like me. :)
  • jjamesjjames Just another dude Posts: 2,905
    Great advice guys, thanks! I think I'll go with sole proprietorship once I finally make a move to full-time independent programming up in Michigan . . . that's if I don't get a job offer up there. We shall see though!

    Thanks again! Keep the posts coming though. ;)
  • JohnMichnrJohnMichnr Junior Member Posts: 279
    I'm an S-corp. There are some really nice tax advantages to being one. See a good accountant. But basically the business is owned by the shareholders, who all share in the profits. All "extra" monies are distributed to the shareholders by percent owned, and they pay taxes on it - not the company. The S-Corp pays no income tax as all profits are distributed tot eh shareholders who pay the tax on it. But the distributions are not liable for federal SS & Medicare withholdings. So for me that means an extra 15% on my profits.

    A lot of people take that and try to minimize their salary to maximize the profits without the 15% withholding. Ah but the IRS looks for that one.

    I carry liability insurance (with is pretty cheep) another 2 mil in an umbrella for a total of 3 M (required by a cusstomer) I also carry insurance on my office for other peoples equipment (for when I have my customers 17" panel get ripped off)

    And now I am considering errors and omissions. I don't have it now - it is much more expensive than liability, but for us it covers some of the areas that liability wouldn't touch. My concern is if I am doing a security system, and something happens in the house, and eith er the touchpanel didn't warn anybody or what ever and they come after me. Liability won't cover this (as per my understanding) but errors and omissions would.
  • jjamesjjames Just another dude Posts: 2,905
    JohnMichnr wrote: »
    And now I am considering errors and omissions. I don't have it now - it is much more expensive than liability, but for us it covers some of the areas that liability wouldn't touch. My concern is if I am doing a security system, and something happens in the house, and eith er the touchpanel didn't warn anybody or what ever and they come after me. Liability won't cover this (as per my understanding) but errors and omissions would.
    That sounds like what a programmer needs. Does errors and omissions basically "include" what liability has as well or would there be two separate policies?
  • ColzieColzie Senior Member Posts: 470
    S-corp for the tax reasons John stated + $2M liability.
  • AvophileAvophile Junior Member Posts: 70
    Kenny wrote: »
    Obviously you can't be a Sole P if you have employees.

    I don't think that's quite right.

    Sole proprietorship simply means you are the sole owner of the business, with no other officers or partners.

    You may have employees, or hire independent contractors.

    You may do business under your name or under an assumed "doing business as" (DBA) name.

    The business name must be registered, typically with your county clerk, as is required to collect sales tax.

    The advantage to a sole proprietorship is simplicity when it comes to taxes, and the avoidance of corporate overhead that, as others have pointed out, no longer serves to shield your assets from liability in the unlikely event that someone might one day obtain a judgment against you.

    Liability insurance serves well as a sales tool; it can also provide you and your clients with peace of mind.

    Perhaps most importantly, it will help you to establish your independence should a firm want to hire you as a 1099 independent contractor to do their programming and in case the IRS wants to challenge whether you are truly an independent business entity, or merely being paid as a contractor as a ruse for your employer to avoid taxation, unemployment and disability insurance overhead.

    As a genuine independent contractor, you should be able to charge the big bucks compared to those briefcase-slamming independent programmers who lack such legitimizing documentation!

    Some of the disadvantages to a sole proprietorship include greater challenges in raising capital and finding good health insurance.

    [disclaimer]
    I am not a lawyer or accountant. You really should verify any and all business advice you receive online with your own, local accountant and lawyer.
    [/disclaimer]
  • JohnMichnrJohnMichnr Junior Member Posts: 279
    jjames wrote: »
    That sounds like what a programmer needs. Does errors and omissions basically "include" what liability has as well or would there be two separate policies?

    E&O is in addition to the general liability. General libaility covers things that you did - like set you laptop down on the 30K boardroom table and left a big scratch.

    E&O covers things you didn't do in your programmig that may come up. Selling that was really ig around the turn of the millenium, where people weren't sure if their systems were going to go haywire with teh new date or not.

    I just got tthe application for E&O. It is like 10 plus pages and goes into all of your business practices.

    I flunked out in the middle of the first page when it asked if I used a contract and to attach a copy of it to the completed application. I'm working on a standard contract but currently don't use one. Without it I don't think I would find an underwritter. But check with your insurance agent.

    Also - in Minnesota, I need to carry workman's comp, and unemployment insurance. both are cheep, especially the UI. As an owner operator I can opt out of them but it ended up being cheeper to just pay them that not. (some tie in with a federal program - it all made sense when I worked through it with my accountant, but I'll be damned now if I remember why)
  • HARMAN_icraigieHARMAN_icraigie Technical Trainer II, Harman Professional University Posts: 580
    Avophile wrote: »
    As a genuine independent contractor, you should be able to charge the big bucks compared to those briefcase-slamming independent programmers who lack such legitimizing documentation!

    Care to elaborate on that one?
  • JohnMichnrJohnMichnr Junior Member Posts: 279
    icraigie wrote: »
    Care to elaborate on that one?

    Yeah - I was wondering about that.

    I have a soft sided canvas bag - would that qualify as a breifcase?
  • AvophileAvophile Junior Member Posts: 70
    icraigie wrote: »
    Care to elaborate on that one?

    No independent programmers were meant to be harmed in my attempt at humor.

    The context is the prevalence of a ruse used by some firms to avoid the liabilities of having employees by designating typical employees as "contractors."

    As a contract worker here in the states, you do offer your customer a greater degree of protection from the tax agency's after-the-fact finding that you are actually an employee (and thus the employer is on the hook for all the deductions that presumably were not made) if you meet several tests of independence.

    Maintaining your own insurance, working unsupervised on a discrete, broadly defined task for which you control the methods of accomplishing it, working according to your own schedule, etc. are indications that you are, indeed, a legitimate contract employee.
  • JohnMichnrJohnMichnr Junior Member Posts: 279
    Avophile wrote: »
    No independent programmers were meant to be harmed in my attempt at humor.

    Boy that's good - now I can unbunch my panties:)

    Avophile wrote: »
    The context is the prevalence of a ruse used by some firms to avoid the liabilities of having employees by designating typical employees as "contractors."

    As a contract worker here in the states, you do offer your customer a greater degree of protection from the tax agency's after-the-fact finding that you are actually an employee (and thus the employer is on the hook for all the deductions that presumably were not made) if you meet several tests of independence.

    Maintaining your own insurance, working unsupervised on a discrete, broadly defined task for which you control the methods of accomplishing it, working according to your own schedule, etc. are indications that you are, indeed, a legitimate contract employee.

    In Minnesota the state is really cracking down on contractors(sub) in the construction industry. You now have to fill out a form showing that the sub is a legitimate business (as mentioned above) or they are to be considered an employee, with appropriate taxing for Unemplyment and workers comp. This just changed this year and affects me if I hire somebody to do graphics for a touchpanel - I have to either make them an employee or they have to be a company.
  • jwilhelmijwilhelmi Junior Member Posts: 13
    Hello,

    Last month, I accepted my first project as an independent programmer. It is located in a skyscraper in downtown Chicago. The first thing I did after the contract was signed was to notify my Insurance agent. I had issues with the E&O side of the policy. We went out for lunch and worked it though together.

    Incorporating + Insurance is a good. It's easier to maintain than a sole propietorship. Yes, there is more paperwork than a SP, but with the s election the tax benifits are better.

    John W.


    JohnMichnr wrote: »
    E&O is in addition to the general liability. General libaility covers things that you did - like set you laptop down on the 30K boardroom table and left a big scratch.

    E&O covers things you didn't do in your programmig that may come up. Selling that was really ig around the turn of the millenium, where people weren't sure if their systems were going to go haywire with teh new date or not.

    I just got tthe application for E&O. It is like 10 plus pages and goes into all of your business practices.

    I flunked out in the middle of the first page when it asked if I used a contract and to attach a copy of it to the completed application. I'm working on a standard contract but currently don't use one. Without it I don't think I would find an underwritter. But check with your insurance agent.

    Also - in Minnesota, I need to carry workman's comp, and unemployment insurance. both are cheep, especially the UI. As an owner operator I can opt out of them but it ended up being cheeper to just pay them that not. (some tie in with a federal program - it all made sense when I worked through it with my accountant, but I'll be damned now if I remember why)
  • ipssheldonipssheldon Registered User Posts: 106
    You should discuss this with your accountant, specific to your situation. Personally, I formed my company as a C-Corp, LLC. This made more sense since I wanted to keep profits in the company as much as possible and simply paid myself a salary. If you take 100% of the revenue out as salary or straight income or whatever, then usually an S-Corp is better. I don't know the specific differences between these and a sole proprietor. LLC is a very good idea because it keeps your personal finances and property separate from the companies. It's my understanding you can form an LLC with either an S-Corp or C-Corp. But I am by no means an accountant or authority on this. A couple hundred $$'s with a lawyer or accountant in this area can be money well spent if your going to be doing this for any length of time.
  • ericmedleyericmedley Senior Member - 4000+ posts Posts: 4,177
    On a related off-topic discussion... I'd like to be independent by year's end. Any advice?
  • KennyKenny Junior Member Posts: 209
    Is everybody tired of workin' for the man? :)
  • ericmedleyericmedley Senior Member - 4000+ posts Posts: 4,177
    Kenny wrote: »
    Is everybody tired of workin' for the man? :)
    ~no comment~
  • jjamesjjames Just another dude Posts: 2,905
    ericmedley wrote: »
    On a related off-topic discussion... I'd like to be independent by year's end. Any advice?

    Great! More competent competition! Thanks!! LOL
  • ericmedleyericmedley Senior Member - 4000+ posts Posts: 4,177
    jjames wrote: »
    Great! More competent competition! Thanks!! LOL

    well, I don't know about the compentent part.
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