how to set up self employed business?

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sky jumper
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how to set up self employed business?

Post by sky jumper »

my wife was laid off but is fortunate enough to be able to do some contract consulting. neither of us know how to set up a self employed business for her. I've heard of S-corps and LLC but know nothing else about them. I am still fully employed (for now, if that matters). I already bought her a new phone and computer and would like to be able to deduct those expenses if possible.
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

sky jumper wrote: Tue Apr 28, 2020 10:00 am my wife was laid off but is fortunate enough to be able to do some contract consulting. neither of us know how to set up a self employed business for her. I've heard of S-corps and LLC but know nothing else about them. I am still fully employed (for now, if that matters). I already bought her a new phone and computer and would like to be able to deduct those expenses if possible.
I highly recommend this book from NOLO:
https://store.nolo.com/products/the-sma ... -smbu.html

There's a California-specific edition, if that applies:
https://store.nolo.com/products/the-sma ... -open.html

I also highly recommend these books from Mike Piper:
https://www.amazon.com/dp/B07TS54XNC/
https://www.amazon.com/dp/B07VS48YWS/
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

I will add that depending on the type of consulting she's doing, she may fine operating as a sole proprietor without setting up an LLC, S-Corp, etc.

Things she should consider:
- Setting up a business banking account
- Setting up a business credit card
- Getting business insurance (particularly for "errors and omissions")
- Registering a DBA, if necessary
- Learning about whether, when, and how to make estimated tax payments
- Learning about Schedule C
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

Single member LLC is simpler than S Corp. She'd basically be a sole proprietor but with the protection of an LLC. She'd file Schedule C profit and loss with 1040 each year. You can enter the computer and phone on Schedule C if they're for business use. That's where she'd list expenses. Open a business checking account to keep everything separate from personal. She may also need a business license from her city. Also look at county and state requirements for fictitious business name (FBN) / doing business as (DBA) filing if the business name does not contain her name. Also check with the state on whether or not she's require to collect sales tax.

Go to https://www.northwestregisteredagent.co ... rvice.html and click on your state. They lay out most if not all of the requirements. I use Northwest Registered Agent for my companies (all single-member LLC's). You can fill the LLC forms out yourself to save some money but I don't think it's worth it. Northwest generates an operating agreement, membership certificate and other documents and that's worth paying for. Their registered agent service is better than most. I wouldn't buy anything additional (beyond LLC formation + registered agent). She can apply for a federal EIN on the IRS website very easily and at not cost (very short form).

Costs will depend on state. Forming the LLC us usually a few hundred. Registered agent service is more or less $100/year depending on who you choose. FBN/DBA costs I've seen are $20 - $30 for multiple years, so almost nothing. A business license might be $100/year depending on city. I advise renting a PO Box (about $120/year). Business checking accounts can be free (I like Azlo; online). The EIN is free forever. TurboTax Self-Employed only costs a little more to do the Schedule C. It's worth looking into business insurance but may want to wait until established. It can be pricey depending on revenue and nature of work (Founder Shield is helpful).

Depending on the state, she'll probably be filing a franchise tax report every year or two. It's pretty straightforward here in Texas (online) and $0 with revenue under $1M. In other states it's more significant (e.g. California's form is longer and there is an $800 minimum even if revenue is $0). I don't use a book keeper or accountant but they can be helpful. Maybe I would in a high regulation state. I enjoy Xero for book keeping. Additional licensing may be necessary depending on industry. Estimated taxes can be paid online via EFTPS.gov (four times yearly). States have their own systems.

One nice thing about being self-employed is that she'll probably be able to contribute more for retirement. The limit for SEP-IRA is up to $56K (dependent on income) versus $6K for Roth and Traditional IRA. It can make resorting to a taxable IRA unnecessary. Health insurance costs for self-employed are atrocious so hopefully she's covered by your work. Still, it's worth being self-employed! There's no salary cap and you can things the way you want. :)

Godspeed!
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

CFM300 wrote: Tue Apr 28, 2020 10:14 am I will add that depending on the type of consulting she's doing, she may fine operating as a sole proprietor without setting up an LLC, S-Corp, etc.
Please don't do that. You'd be risking all of your personal assets in a lawsuit. The LLC limits your personal liability. Only the company is liable. A sole proprietor is themselves the "business" entity so if someone comes after your business then they come after your house, your savings and so on. With an LLC you must keep your personal and business finances totally separate in order for the protection to have effect. If you don't then you've "pierced the corporate veil" and could be treated as a sole proprietor in court.

If you're in a high regulation state with unreasonable franchise taxes, still choose single-member LLC over sole proprietor. You don't want to get slammed trying to save a few bucks or time on paperwork.
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

ThunderTurtle wrote: Tue Apr 28, 2020 10:38 am The LLC limits your personal liability. Only the company is liable.
From NOLO:

"There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business.
...
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business."

https://www.nolo.com/legal-encyclopedia ... guide.html

So if OP's wife is not going to be acquiring business debt or business financial obligations like on-going rent, then there may be zero benefit from registering as an LLC, since she'll be personally liable for all of her actions, including those that might be deemed negligent. Hence my recommendation that she get appropriate business insurance.
WildBill
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Re: how to set up self employed business?

Post by WildBill »

Howdy

Not enough information to advise you properly, but here is what I did to set up Wild Bill Consulting. It is all pretty easy to do - do not complicate it.

- Got a business name and registered an LLC. Structure is sort of irrelevant if it is a one man show, but having an LLC on the business card gives some credibility and it only took five minutes and about $100 to set it up online in Texas. Having this was handy when I set up a self directed Keough account to make retirement plan contributions.

- The advice above about an LLC limiting liability is sort of flaky. It is dependent on state and circumstances. Best to assume that an LLC will not limit liability. So-

- Get business insurance if the consulting work is going to create risk. A 2 million policy usually runs $1000/ plus or minus. A lot of customers may require insurance and proof of insurance as a condition of contract, so might as well plan on it.

- Got EIN tax number from business online from IRS.

- Got a business bank account and business credit card in the name of Wild Bill Consulting LLC. They usually want an EIN to set up a business account.
Then the hard part - get customers and start working and invoicing!

Good luck to your wife.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
simas
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Re: how to set up self employed business?

Post by simas »

CFM300 wrote: Tue Apr 28, 2020 10:59 am
ThunderTurtle wrote: Tue Apr 28, 2020 10:38 am The LLC limits your personal liability. Only the company is liable.
From NOLO:

"There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business.
...
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business."

https://www.nolo.com/legal-encyclopedia ... guide.html

So if OP's wife is not going to be acquiring business debt or business financial obligations like on-going rent, then there may be zero benefit from registering as an LLC, since she'll be personally liable for all of her actions, including those that might be deemed negligent. Hence my recommendation that she get appropriate business insurance.
+1 . please do not waste time and money on this as it protects you from exactly nothing as single person LLC in terms of liability. may look 'cooler' and may and may not help with marketing but useless otherwise with on-going permanent filling costs.

also, if you think you can acquire 'business debt or business financial obligations' without personal guarantees for such 'entity' you are deeply mistaken, zero chance of that so it gives you nothing in terms of protection in that area too.

you can do everything including Solo401/retirement plan ,EIN , etc without going for LLC.
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

CFM300 wrote: Tue Apr 28, 2020 10:59 am
ThunderTurtle wrote: Tue Apr 28, 2020 10:38 am The LLC limits your personal liability. Only the company is liable.
From NOLO:

"There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business.
...
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business."

https://www.nolo.com/legal-encyclopedia ... guide.html

So if OP's wife is not going to be acquiring business debt or business financial obligations like on-going rent, then there may be zero benefit from registering as an LLC, since she'll be personally liable for all of her actions, including those that might be deemed negligent. Hence my recommendation that she get appropriate business insurance.
NOLO gives examples of what you're talking about. There is a whole lot more a business can be sued for (this is America). You don't want your personal assets on the table if at all possible. This is why I suggest both forming a separate business entity and looking into business insurance.
https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html wrote: - personally and directly injure someone during the course of business due to their negligence
- fail to deposit taxes withheld from employees' wages
- intentionally do something fraudulent, illegal, or reckless during the course of business that causes harm to the company or to someone else, or
- treat the LLC as an extension of their personal affairs, rather than as a separate legal entity.

...

Example: Assume that two of the three owners of Acme Bakery LLC (from the example above), knew that their driver was drunk, but let him make deliveries anyway. They can be sued and held personally liable for negligence by the brain surgeon’s heirs.
Notice that one of the three owners had no knowledge in this example. Even if you think your business is low risk, form a separate business entity. You don't want a judge looking at your house and personal investments as part of your business. Insurance is no guarantee any more than an LLC is, so take advantage of both and do your best.
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

ThunderTurtle wrote: Tue Apr 28, 2020 12:26 pm Notice that one of the three owners had no knowledge in this example.
We're talking about a sole prop vs. a one-owner LLC. If multiple owners or employees, then yes, of course you need an LLC, LLP, or corporate structure for liability.
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

CFM300 wrote: Tue Apr 28, 2020 12:35 pm
ThunderTurtle wrote: Tue Apr 28, 2020 12:26 pm Notice that one of the three owners had no knowledge in this example.
We're talking about a sole prop vs. a one-owner LLC. If multiple owners or employees, then yes, of course you need an LLC, LLP, or corporate structure for liability.
The only difference is with taxes, not liability.
J295
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Re: how to set up self employed business?

Post by J295 »

CFM300 wrote: Tue Apr 28, 2020 10:59 am
ThunderTurtle wrote: Tue Apr 28, 2020 10:38 am The LLC limits your personal liability. Only the company is liable.
From NOLO:

"There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business.
...
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business."

https://www.nolo.com/legal-encyclopedia ... guide.html

So if OP's wife is not going to be acquiring business debt or business financial obligations like on-going rent, then there may be zero benefit from registering as an LLC, since she'll be personally liable for all of her actions, including those that might be deemed negligent. Hence my recommendation that she get appropriate business insurance.
Would be highly interested in seeing what authority, other than a lawyer in an article saying so, exists for the proposition that The member of a properly organized and funded and operated LLC is personally liable for the negligent acts taken by the member in furtherance of the activities of the LLC. Would be particularly interested in a citation to the statutory basis for this statement, or authoritative caselaw from the highest court of the appropriate jurisdiction. The author claims this is true in every state.
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

I think there is some misunderstanding here so let me post this. Some here seem to be saying that a single member LLC offers no protection beyond sole proprietorship because there is one owner and that a multiple owner LLC offers more protection. This is only true if the single owner is piercing the corporate veil. And it should be said that owners in a multiple member LLC can just as easily be liable for personal negligence as the owner of single-member LLC.

From Intuit/Quickbooks: https://quickbooks.intuit.com/r/structu ... opreneurs/
Sole proprietors are not protected from any business liabilities. If the business were to take on debt, file bankruptcy, or dissolve, creditors can go after the owner’s personal assets, including bank accounts, houses, cars and other property.

Single-member LLCs are attractive because they can shield owners from the liabilities associated with the business. However, the limited liability protection isn’t as robust as it is for traditional LLCs (those with multiple members).

A court may overturn any business owner’s liability protection. Limited liability is based on the idea that the company and the individual are two separate entities. Since a single-member LLC is a disregarded entity, owners are less likely to keep personal and business affairs separate, and a court may be more likely to pierce the corporate veil.

If the corporate veil is pierced, the court may allow a creditor to go after the personal assets of the LLC member.

To keep your liability protection intact, you need to make sure that you cross your T’s and dot your I’s. Single-member LLC owners should maintain a formal operating agreement that governs how the LLC functions, ensuring that the business complies with both federal and state law. Owners should also keep all business and personal financials separate from one another.
A single member-LLC offers the simplicity of sole proprietorship with regard to taxes while at the same time providing the same protection as a traditional LLC (so long as the owner does not intermingle personal finances, which is easy to avoid).

Focus on this part:
If the corporate veil is pierced
If you're running your business properly, that should not happen. If as a single-member LLC you're operating like a sole proprietor, treating things like a hobby and don't have separate bank accounts then perhaps you will find yourself in the same kind of trouble as a sole proprietor would. Otherwise, you're as protected just the same as any other LLC.

I'm no attorney so don't act on what I am saying, but I think there's enough information out there to make this clear.
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

ThunderTurtle wrote: Tue Apr 28, 2020 12:55 pm Some here seem to be saying that a single member LLC offers no protection beyond sole proprietorship because there is one owner and that a multiple owner LLC offers more protection.
No. What's being said is that an LLC will not protect you from liability arising from your own negligent actions. It doesn't matter how many owners or employees there are. You can't act negligently and escape liability for your own actions by hiding behind an LLC. An LLC can protect an owner from liability arising from negligent actions of employees or co-owners, but that doesn't apply in the case of a solo consultant, which is what we're discussing.
terran
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Re: how to set up self employed business?

Post by terran »

ThunderTurtle wrote: Tue Apr 28, 2020 12:55 pm ...
Otherwise, you're as protected as any other LLC.
...
Let's put it this way: If I do something wrong while working for your LLC then I can be sued personally and your LLC can be sued since I was acting as an agent of your LLC, but you can't be sued personally*. Why should it be any different if I do something wrong while working for my own LLC? I can still be successfully sued personally for my own wrongdoing. So yes, a properly administered LLC provides legal separation between my assets and company assets, but if I'm the only agent of the LLC then anything the LLC does is also something I do personally.

I think there might be some situations (like an LLC that owns property), but for consulting business where all interactions with the LLC are also interactions with the consultant I can't see how one can claim that the consultant isn't personally liable for there own actions.

* Of course, anyone can sue anyone, so when I say "can't be sued" it should be read as "can't be successfully sued."
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

CFM300 wrote: Tue Apr 28, 2020 1:13 pm
ThunderTurtle wrote: Tue Apr 28, 2020 12:55 pm Some here seem to be saying that a single member LLC offers no protection beyond sole proprietorship because there is one owner and that a multiple owner LLC offers more protection.
No. What's being said is that an LLC will not protect you from liability arising from your own negligent actions.
Nobody said that it does.

What was suggested is that a single-member LLC may not provide more protection than a sole proprietorship. I don't want anyone to read that and think they're just as safe simply because they have business insurance. It is always preferable to take the extra step to separate the business entity from yourself.
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Re: how to set up self employed business?

Post by CFM300 »

ThunderTurtle wrote: Tue Apr 28, 2020 1:21 pm What was suggested is that a single-member LLC may not provide more protection than a sole proprietorship.
Correct, particularly for the case being discussed.
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Re: how to set up self employed business?

Post by ThunderTurtle »

terran wrote: Tue Apr 28, 2020 1:16 pm I think there might be some situations (like an LLC that owns property), but for consulting business where all interactions with the LLC are also interactions with the consultant I can't see how one can claim that the consultant isn't personally liable for there own actions.
Maybe my perspective is different because I am not a consultant, which is what this thread is about. My thinking is in terms business entity type, not profession. There is so much that can bring about a suit that I cannot imagine a situation in which it would be preferable to operate as a sole proprietor. It's hard for me to imagine a person's profession causing them to automatically pierce the corporate veil.
terran
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Re: how to set up self employed business?

Post by terran »

ThunderTurtle wrote: Tue Apr 28, 2020 1:43 pm
terran wrote: Tue Apr 28, 2020 1:16 pm I think there might be some situations (like an LLC that owns property), but for consulting business where all interactions with the LLC are also interactions with the consultant I can't see how one can claim that the consultant isn't personally liable for there own actions.
Maybe my perspective is different because I am not a consultant, which is what this thread is about. My thinking is in terms business entity type, not profession. There is so much that can bring about a suit that I cannot imagine a situation in which it would be preferable to operate as a sole proprietor. It's hard for me to imagine a person's profession causing them to automatically pierce the corporate veil.
Really? The only examples I can think of where the business owner might not be personally liable are if 1) more than the single owner works for the business or 2) the business owns property on which someone can be injured in the absence of the owner and through no lack of care of the owner in preventing such an injury. As far as I can think any harm caused while the sole owner/employee is actively engaged in the business or caused by improper care/caution by the owner of property owned by the business would result in personal liability.
CFM300
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Re: how to set up self employed business?

Post by CFM300 »

ThunderTurtle wrote: Tue Apr 28, 2020 1:43 pm It's hard for me to imagine a person's profession causing them to automatically pierce the corporate veil.
It's not that the person's profession pierce's the corporate veil, but rather that as a solo consultant working from home with no employees, the only possible sources of liability are from his/her own actions. That sort of liability can't be avoided by establishing an LLC. Appropriate insurance is what's needed. Errors and omissions, cyber insurance... whatever is appropriate given the business being conducted.
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ThunderTurtle
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Re: how to set up self employed business?

Post by ThunderTurtle »

Thank you all for the insight.
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sky jumper
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Re: how to set up self employed business?

Post by sky jumper »

thank you all for sharing your insights. you are all VERY much more knowledgeable than I am. To add some clarity - my wife will be providing professional consulting services (marketing) out of our home. The clients are large corporations that need marketing help. I honestly can't imagine any scenario where she would be held liable for anything. Nobody will be visiting our property. She isn't delivering any type of physical product (only intellectual). Her only business expenses will be 1) the cell phone, 2) the computer, 3) periodic air travel within the US.

Based on what you all are saying, it seems an LLC isn't strictly required in this case because it may not provide more insulation from personal liability. But I'm still confused about the S-corp tax treatment of salary... so if her clients were to pay $100/hr for services rendered, but a "salaried employee" at a similar company were to be paid $100k/yr for the same type of job, to me that says there's a tax advantage to set up an LLC and claim S-corp tax treatment with a $50/hr salary. Or can you essentially do the same thing as a sole proprietor?

again, thank you all for your help. I have no idea how to actually implement what I described above.

edit: we are in Illinois, if that matters.
simas
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Re: how to set up self employed business?

Post by simas »

sky jumper wrote: Tue Apr 28, 2020 5:10 pm thank you all for sharing your insights. you are all VERY much more knowledgeable than I am. To add some clarity - my wife will be providing professional consulting services (marketing) out of our home. The clients are large corporations that need marketing help. I honestly can't imagine any scenario where she would be held liable for anything. Nobody will be visiting our property. She isn't delivering any type of physical product (only intellectual). Her only business expenses will be 1) the cell phone, 2) the computer, 3) periodic air travel within the US.

Based on what you all are saying, it seems an LLC isn't strictly required in this case because it may not provide more insulation from personal liability. But I'm still confused about the S-corp tax treatment of salary... so if her clients were to pay $100/hr for services rendered, but a "salaried employee" at a similar company were to be paid $100k/yr for the same type of job, to me that says there's a tax advantage to set up an LLC and claim S-corp tax treatment with a $50/hr salary. Or can you essentially do the same thing as a sole proprietor?

again, thank you all for your help. I have no idea how to actually implement what I described above.

edit: we are in Illinois, if that matters.
what revenue does she (or you ) expect annually? how much of that money is necessary for living expenses? how much does she/you want to save off for retirement? all of this matters.

Nothing magical in S-corp, just a set of trade offs in taxes with pro/cons.

Stop worrying about setup. Help her with marketing /rates! rate the rates appropriately, raise them over time if you can :). her own marketing (and keeping the pipeline of clients as well as various partnerships (subcontractor for someone else)) is much more important than any tax setups.
WildBill
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Re: how to set up self employed business?

Post by WildBill »

Howdy

Bit clearer now.

Forget about the S Corp. There are no advantages and you have more complexity. A sole proprietorship or LLC is fine, and as there are no major advantages to the LLC in this case I would only do the LLC if it was easy to set up. An LLC may have more “juice” when it comes to branding and marketing.

You will find that being an independent contractor under the current tax regime is pretty good. You can write off all expenses, there is the QBI deduction and there are several retirement savings plans that work well.

You will need some form of quotation/contract to send out quotes that has terms and conditions of work. Need boilerplate in it that specifies the work is for consulting purposes and that this is or best effort and the client uses the data and analysis at their own risk. Get a lawyer to set it up - won’t cost much- or copy one from somebody who knows what they are doing in the same space.

Some clients may require you to carry insurance, but it doesn’t seem like that will be a big issue.

Hard part is getting customers and getting paid. I would spend 99% of my time worrying about that and 1% worrying about structure.

Happy market segmenting

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
JBTX
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Re: how to set up self employed business?

Post by JBTX »

I did this quite a few years. Just a sole proprietorship. First gig went for years with no contract. Just sent them bills, and they paid. Second long term gig I did have an agreement whixh was the clients boilerplate.

I probably should have had liability or e&o but never did. The couple of times I looked I couldn't find easily available options, which are often state specific. What I did really wasn't a huge liability risk, and push come to shove I could have probably counter sued that I was in fact an employee.

I never had a separate bank account, as I had very few expenses other than auto mileage

Bottom line, you don't have to do anything. You probably should:
- evaluate liability and/or E&O insurance.
- set up solo 401k - but you can wait until end of calendar year.
- get irs tax ID number. You don't need one, but you may need one for solo 401k, and they are great for getting accepted for business credit cards and bank accounts with large bonuses.
Old Sage(brush)
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Re: how to set up self employed business?

Post by Old Sage(brush) »

There could be tax planning opportunities with an S Corp where she pays herself a reasonable salary and distributes any profits above that amount. The distributions wouldn’t have payroll taxes so potential savings of 15% on those profits. OP should talk to an accountant to see if tax planning in an S Corp is possible after looking at the more detailed business plan.
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