How to form a LLC or S-corporation as Independent Contractor?

[JeffSkydiver 0]

Forming any type of business entity is easy enough for a 7th grader to do in less than an hour.

Knowing WHICH entity to use after considering at least 9 vital factors, WHICH provisions should or should not be a part of the articles and bylaws and the decisions regarding capitalization and tax treatment and future growth and developing a viable business plan... well any venture worth doing is worth doing right. Consult a lawyer with a strong or exclusive background in business start-ups and entities and taxes and you will have done yourself a great favor. With the right attorney, I have never met a successful business owner who regretted the time and expense of doing it right - right from the beginning.

CPA's, like anyone else, can fill out the forms to start an entity - so can a 7th grader. You need more than that for a successful launch.

jt

*

Let's all do this safe enough that we can still do this in our 90's.

[JohnnyD 0]

** Public Service Announcement **

There has been both good and bad info on this thread, the worst of which has come from attorneys and the best has come from a certain gear shop owner.

CPAs deal with corporate formation and tax consequenses as part of their jobs. Attorneys probably do not, unless they are tax attorneys. Take it for what its worth, but you don't call your doctor when your car needs a tune-up and you don't call your mechanic when you have a rash.

No offense to the attorneys posting, as it can be extremely beneficial to people if a highly skilled professional can point them in the right direction, but posting bad info can be very detrimental for a collective group that can be easily damaged if they have to shell out a bunch of money for services that they neither need nor can afford, which can be further compounded by the info being bad.

Take care of yourselves out there, cuz no one else will.

Peace

** End of Public Service Announcement **

[JeffSkydiver 0]

Most attorneys are NOT litigators. Many are transactions lawyers, in some type of transaction or another. Many are strictly business and business entity lawyers. Lawyers specialize. There are some who still do a little bit of a lot of things. I'm not talking about those. I'm talking about hiring a lawyer that specializes in business formation, counseling business owners, buying and selling businesses and the legal work collateral to those transactions. That type of lawyer, if he or she is good at what they do, is any business owner's best bet. They do not see things through the tunnel vision of taxes. They see the panoply of issues such as control, alienability, liability, majority v. minority ownership interests etc., etc.,

my $0.02

*

Let's all do this safe enough that we can still do this in our 90's.

[TomAiello 26]

Quote

According to www.legalzoom.com any practice that requires a professional license must be started as a Professional corporation or " P.C"

Can a Tandem Master or a Jump Pilot qualifiy as a licensed professional in order to start a Professional Corporation?

You want to avoid starting a P. corporation (either P.C. or P.L.L.C.). The P type is a device the government uses to prevent folks from shifting money around to lower tax brackets. It requires the corporation to pay taxes at the personal rate, which is higher.

Pretty much the P corps are intended to make doctors, lawyers, CPA's etc, pay full personal income tax rates on professional income.

Don't start a P corp if there is any way to start a non P.

-- Tom Aiello

Tom@SnakeRiverBASE.com
SnakeRiverBASE.com

[tdog 0]

This is gonna be long winded… I assume the original poster of this thread cares, and therefore I am giving him some of my time and opinion, but, here is your last warning to skip to the next post if you really don’t care…

First, so you know my perspective, I have owned a few businesses. I have had to shield our employees and myself from a lot of risks.

So, this is not my first rodeo, even though I will gladly tell you I am not a CPA or Lawyer and still make business mistakes every day… I have run a single person operation with me as the sole employee. I have owned a partnership. I have owned a company with many employees. Been there, done that, and still doing that… Here is my experience…

First – break companies down to a few types. There are the multinationals corporations owned by many people. Then there are the large family owned, partner owned, or solely owned businesses. Lastly, there are the sole proprietorships owned and run by one person, for an example, an architect that owns his own solo practice… Most skydiving instructors I have met are in this last category as they work for a DZ as an independent 1099 contractor. A DZ may be the middle category, especially if they are big and own a lot of assets. I don’t think anyone in this industry is a multi-national.

Each business type has different problems to solve. For an example, a business owned by more than one person ads a lot of complications a single owner business does not have… Multi-owner businesses require a shit load of paperwork to protect the business owners from killing each other over day to day issues.

But, my following advice is based upon the notion that, a skydiving instructor will own their own business with no partners, and based upon the first post that started this thread, that no employees will work for that business (but may hire other independent contractors on a 1099 basis to support the business).

My opinion is that there are two big picture items to tackle for this type of business beyond marketing and finding paying customers. Liability and Taxes/maximizing take home profit.

LIABILITY

You need to shield your assets and net worth from the lawyers who are working for the other side… If you are a shareholder in a publicly traded company, your risk exposure is only the value of the shares you own… Here a business truly does protect you. Since you are not materially involved in the day to day operations, your personal liability is limited.

But, I don’t buy the argument that a business entity will shield personally owned assets when the business is owned and run by a single person. I know of a few small business owners who were personally sued, and I know of a few CEOs of multinationals taken to court for their personal negligence in running the corporation.

I think skydiving makes businesses able to shield from risks from their owners even more difficult because most skydivers do it for fun also, so you will have to prove you were “working” the moment the incident happens that you are being sued for. You will also have to prove your equipment was owned, maintained, and operated by the company and not you personally. You will have to prove every word that came out of your mouth before the incident was the word of the company, not the word of you personally. And, if those words came out after the beer light came on, the jury is going to be curious as to why you were “working” while “drinking”.

Also, what happens if the person you collide with is not a customer of your business but a third party on the same jump working with another instructor or on a fun jump? His lawyer can sue you personally pretty easily because this 3rd party does not have an agreement with your company, but was jumping with you personally. That argument could be turned around 180 degrees if the money was in the company.

Anyway – the point being, I believe any good lawyer will figure out where you keep your assets and find a creative way to go after that entity. So unless you give all your assets away, I don’t believe a business entity will shield your assets from a lawyer. Instead, here is a brainstorm of initial things to consider (based upon some things that have protected me in the past)… You probably know these already...

a. Get good documents (contracts, waivers, employee handbooks, etc). Use them. Make sure a sympathetic jury will believe them and understand them.

b. Conduct yourself at all times professionally, on and off the clock. No matter how good the documents are; a sympathetic jury is always going to go with the victim if the accused is perceived as doing something risky (or more risky than others doing the same thing). “Ya, the victim knew the risks, but his instructor was seen leaving the plane without doing… The instructor should have been able to eliminate this risk, not cause it…”

c. Follow standards (such as the USPA guidelines or any guidelines you can prove someone else created). If you tell a jury, “I followed this list of procedures, generated by experts in the field much smarter than me, reviewed by hundreds of my peers, respected by thousands – and the accident still occurred – this was a risk in skydiving the participant knew about while following the standard procedures,” I believe you will be much better off than saying, “I personally put together these procedures, I have tons of experience, and shit just happens in skydiving.”

d. Follow the manufacture’s instructions. Duh… But it ain’t your fault if you did what someone else told you to do…

Synopsis of c and d above… Whenever you do not make the decision to do what you do, you can transfer the liability to the person/entity who told you what to do. If you have good reason for following their instructions, the jury might buy it. Trade organization guidelines and manufactures instructions are to real easy things to transfer blame to.

e. Refuse to work with customers that are higher risk than industry norm. I know this sounds hard – but I have turned down a million dollar contract because I saw risks I did not want to put on the line and in negotiations with the customer they were unwilling to adapt their expectations back to what we were willing to risk.

f. Be careful of everything that is said or done, especially on video that will be played to a jury. If you think a jury might take it the wrong way, they probably will. If you say it to your best friend, expect them to have to testify…If you send it in e-mail, expect it to be printed.

g. Do a careful risk analysis. Document every known risk, how you intend to deal with it, and any risk that remains after you have done everything possible to eliminate the risk. Put a dollar value on what the risk is exposing you to… See next line, because in a “normal business” you can protect yourself from the $ you are still exposed to.

h. And lastly, since life is full of risks… insurance… But I know this is probably pretty difficult in skydiving…. So you might just have to accept the risk. If you can’t get the insurance, which I believe you if you say you can’t, at least find a real good business insurance broker (not your local guy who sells your personal lines) and get his advice… My insurance brokers have given me more advice than my lawyers and CPAs combined – they see every claim, not just the ones that goto court.

i. And, very lastly – never tell people what kind of insurance you have unless you absolutely need to. Don’t let them think there are pockets to be dug into. Example – if a customer of mine asks for a certificate of insurance, we put on it the limits he requests, not the limits we have. Why let them know how deep our pockets are and what we are covered for???

Anyway – solve this problem with a good lawyer who knows liability claims and who knows how to protect you from them…


TAXES

What type of business gives you the most take home pay is a hard question. I probably could answer that for you in my home state, but I bet you live in one of the 49 others. A good CPA who works with a good Lawyer can help you. But, realistically, your income may not be in the millions with skydiving or flying a plane – so you have less to play with when playing with the tax laws than the rich guy next door… There are a lot of issues here… For an example, if you are an employee of a company, the company needs to pay unemployment insurance on you. That could be as high as 3%. Make sure you just don’t look at the federal taxes when putting together the bottom line. Put in all the business expenses from tax accountant fees to operational expenses associated with the type of business you are creating.

There are ways to split your income into “salary” and “dividends” with some types of companies that give tax advantages, but again, these tools are of greater help to people who have $250,000 in income, not people with $50,000 in income… Especially since the “dividend” should be coming from the profit of the operations of the company if you never showed up to work and hired someone to run it for you, and the “salary” should be compensating you for your involvement in day to day operations if you chose to be involved, it will be hard to convince the IRS what should be dividend versus salary unless the company has a lot of profit from its assets and good will.

So, what I would do is place your projected income on the top of a spreadsheet and figure out the TAKE HOME PAY for each business type on the bottom. The most money wins… It might take two companies working together to get the most money. A CPA, not a lawyer, will know how to make this sheet for you.

And, while I did say above that a business entity will not provide adequate risk shielding without doing a bunch of other things – I do believe there are some business entities that may shield your assets better than others, and don’t forget to ask how to shield your personal assets from yourself so you can’t be expected to sell them to pay off a lawsuit…

Once you have put together a list of the most tax efficient business you may have to choose a more expensive business in order to shield your assets… But I would not make that decision until you know how much more you will have to spend. Then the decision is like buying insurance. “Should I spend $X more to limit my risk by $Y?”

Anyway, sorry for the long winded post… Take it for what it is worth… It is opinion and personal experience only…

[lawrocket 3]

Quote

There has been both good and bad info on this thread, the worst of which has come from attorneys

Dang. You took the words right outta my mouth.

Anyone who takes the advice of a person on these boards without clarifying with a qualified individual in person is looking the wrong way down a railroad track and wearing ear mufgs...

My wife is hotter than your wife.

[DrewEckhardt 0]

Quote

I think that the minimum taxes for a corp might not be benefitial. a DBA (Sole Proprietorship) might be better.

Forming a corporation or LLC really cuts your tax bill especially when you're not making a lot of money.

1. An entity which has filed form 2553 does not pay corporate taxes. Profits "pass through" to the owners where they are taxed at the individual rates.

2. Only salary is subject to the FICA/Medicare taxes which total 15% for employer/employee share until you reach $89.700 of salary. As long as you pay yourself a reasonable salary you can take the rest of your profits as distributions. In my case my accountants thought this number was 50% of profits. With less income FICA makes up a bigger precentage of your total tax bill.

3. Companies can provide benefits for their employees like health insurance so you're not paying taxes on that.

Another advantage is that you're an employee, not self employed. Your employer (you) pays state and federal unemployment insurance premiums so when you run out of work you can lay yourself off and collect unemployement. Caps and federal credit for state payments mean this does not cost a lot.

[GravityGirl 0]

You have to look at the individual numbers. There is a sweet spot.

For example minimum State Tax in California for an LLC is $800/yr. Depending on the amount of money he will be claiming to make, that might be higher than if he files a Schedule C as a DBA or Sole Proprietor. Even with Self Employment tax.

Best advise is to sit down with a trusted Accountant and do the math.

~~~~~~~~~~~~~~~~~
Peace and Blue Skies!
Bonnie ==>Gravity Gear!

[webracer 0]

I don't think an LLC or S-corp is necessary, but the best place to incorporate is Nevada. Do some online searches, it is cheap, they will setup virtual offices for you, and Nevada historically protects its corporations very well.

Troy

I am now free to exercise my downward mobility.

[lawrocket 3]

Quote

I don't think an LLC or S-corp is necessary, but the best place to incorporate is Nevada. Do some online searches, it is cheap, they will setup virtual offices for you, and Nevada historically protects its corporations very well.

Better check your state's tax laws first to find out whether you'd be exempt. For example, here in Cali, if I have a corporation that literally does business here in Cali (i.e., HQ here, storefront, all sales here) then Cali will get its taxes. On top of that, start up costs and compliance costs in Nevada may actually be higher. So, you may pay more money to Nevada for corporate licences and compliance, and still pay the California taxes, which would be a net increase in your cost of doing business.

Dont' go assumng your state of domicile hasn't carved out rules in its revenue code for that situation.

My wife is hotter than your wife.