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Re: Should a consultant incorporate (and how)?

by mr_mischief (Monsignor)
on Jan 09, 2009 at 16:46 UTC ( #735242=note: print w/replies, xml ) Need Help??

in reply to Should a consultant incorporate (and how)?

I am currently a sole proprietor. This opens me to many forms of liability a corporate employee or shareholder normally is not theoretically. However, unless you have what a court would call a valid corporation, you can still be held personally liable from what I understand. IANAL, and I don't play one on TV or the Internet, so this isn't legal advice.

As I understand my own jurisdiction at a minimum you must have a board (who can be friends and family), you must have so many periodic meetings (with frequency determined by jurisdiction) with formal minutes, you must be able to produce fairly recent bookkeeping upon demand at any point, you must have a registered agent in the state in which you incorporate (which can be, but doesn't need to be, you if you incorporate in the same state in which you live and otherwise you can hire a company that does this for you for not very much). I know people who own small corporations whose board meeting is dinner with 5 minutes of new business and 5 minutes of old business between the main course and dessert, with someone keeping notes. The minutes are an official record and must be kept, but they can be transcribed from a spiral notebook into something more formal.

I do know people who have incorporated without the help of an attorney. One consultation with an accountant to see about tax rules and another with an attorney about everything else shouldn't be that expensive, though. There are forms you can buy and books you can read for doing it yourself.

One thing you always want as a business owner, whether a corporation, a limited liability company, or a proprietorship, is business liability insurance. There is something the insurance industry calls a "business key policy" which covers many different types of liability under one package for not very much in premiums. Ask your agent about that. This covers things like slip-and-fall at your location, loss of your computers to fire, etc. It's a nice security blanket, and some office complexes won't even rent space to a business without some minimum coverage. My minimum coverage for my office is $1,000,000 but it's not that expensive to get the policy.

Another type of insurance to consider is called an "errors and omissions" policy, which protects you in a suit over bugs in your code or failure to implement exactly to spec or other professional errors. That's quite a bit pricier and most of the small business owners I know cover liabilities like that in contracts alone. Your best bet, of course, is to do good enough work not to get sued. ;-) All my customers sign contracts stating who is liable or not for what parts of a project. I refuse to be liable for being provided a poor spec, for not being provided the customer's content or spec on time, for extra time required by changes in the spec, etc. My customer's losses for bugs or downtime are limited to being refunded the cost of the project. A good contract lawyer can draw something like that up to fit in a page or two, at least for my state. Mine is combined with the order acknowledgment and often I staple the customer's paper specs right to that when they provide a paper spec. They sign once to finalize the order, agree to pay, and agree to the terms. The biggest hassle has not been getting it written, but getting everyone to sign it and keeping it filed.

I currently have an office outside the home, and that's nice for the foot traffic I get. OTOH, being interrupted by foot traffic during programming can be a pain. I'm lucky to be in a historic building with utilities included for a very reasonable rent. If I wasn't here, I'd be in one of the small business incubator buildings in town. If I wasn't so lucky, I'd probably be based from home myself.

Look into an IP phone service. I have another small business owner with whom I do many joint projects. We also refer many people back and forth. We're probably getting a system together so we can conference and transfer calls back and forth between our different physical locations. It's going to be less than I pay for two voice lines with voicemail as it is. With just one person, you might even be able to use Vonage or such. Having a system that lets you take a business call on your main published line from a different location is nice. You might also consider using a cell phone, possibly with a separate phone number for the business. Adding a line with its own voicemail to your existing plan is probably cheap, but if you incorporate you might want a separate plan. You might be able to have the corporation reimburse you for just the one phone and number on a multi-phone plan, but you may not. You might want to check that part with the lawyer and accountant if you do talk to them.

My sister-in-law is a CPA specializing in SMB and local government accounting, so I'd use her even if I didn't need an accountant. Since I'm a 1099 recipient instead of a corporation, I'm not sure I'd trust myself to file the taxes. I still would prefer not to do my own books or taxes even if I had a corporation. I'm also lucky to be friends with a number of lawyers, including one of the owners of the assets I bought to start this business. Nearly all my legal documents for the business were written by the contract lawyer who was a partner in the company that previously owned the customer list and leased the office space I use. I wouldn't assume anything, but if you have close friends or family members in these two fields you might catch a real break.

This isn't legal advice and may be different in your state anyway, but I do know people who are able to deduct commuting expenses to client sites, books, laptops, and even meals while on the road. They have cleared these deduction decisions with their attorneys and accountants, though. I always have someone look over my stuff, too, but as I said I have connections in those fields.

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