Bones Inc.

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One of the job prospects I was interviewing with presented me with a question last week:

“We’d like to schedule a final culture interview with you, but before we do, we were wondering if you would entertain a contractor role?”

Given I don’t know what’s actually involved with that, I went with an honest answer of “I don’t have the necessary background to act as a 1099, so it would have to be full time.” What I should have said was “Possibly. What kind of contract are we talking about?” Assuming the last round went well, I basically had that position in the bag. Instead, I extended my search by at least a week by unnecessarily shooting down the possibility.

So that got me to thinking: just what exactly is involved in acting as an independent consultant? Given its prevalence in tech, it’s somewhat odd that there really aren’t many guides from the perspective of someone who’s done it. So I put on my research hat and started talking to people I know, one of which has been doing it for over 25 years. What I’ve found out with some follow-up research basically boils down to this:

  1. Get a service to handle most of the paperwork. He recommended LegalZoom, but I explored some competitors and eventually settled on Northwest Registered Agent if I decide to go forward with it.
  2. Designate a registered agent. LLCs need a public-facing address that can be used for official purposes, including paperwork and other legal requirements. Rather than having my home address directly stamped on public documents, an RA can take that role, and forward any important documents to me.
  3. Get an EIN from the IRS. This fills a bunch of roles, including associating the company with bank accounts, associating it with tax filings, and so on. Speaking of which…
  4. Open a business bank account using the EIN. This creates a Great Wall between the business and personal finances. It also greatly simplifies accounting, payroll, and other necessities.
  5. Make a Capital Contribution to the business account to “bootstrap” it. It would be pretty had to pay for business expenses without money.
  6. Get a payroll account with a company like ADP, OnPay, Gusto, or even Quickbooks. This will make taxes much easier, and some of these services have reimbursement systems for mileage and other expense tracking. It also fulfills the critical component of paying a salary to my employee: me. This also needs the EIN from earlier, and links to the business bank account. In order for this to work, I’d need to…
  7. File to have the LLC taxed as an S-Corp. Unlike an owner-operator that must pay double FICA taxes on all business profits, S-Corps have a more traditional setup. They pay the employee a salary and it’s that salary that gets the FICA treatment. The remainder of income for that year is treated as profit and gets taxed separately.
  8. Optionally (not really) get a business credit card. This would only be used for anything that would qualify as a business expense. Again with the EIN.
  9. Optionally (arguably necessary) find a CPA. All of the above is still pretty involved, and when the end of the year comes, it pays (hah) to have someone to go over invoices, reimbursements, expenses, etc. to double-check. They also double as a tax-prep service in most cases, and I pay one of those every year anyway.

There are also the usual steps necessary to even start the process, such as figuring out the company name, getting a corresponding domain name and website for it, possibly filing for any trademarks, etc. The benefit for all of that work is the ability to claim business expenses, such as my home office, the electricity used by my servers and desktop, and so on. Heck, I could have expensed the servers themselves since they’re a legitimate business cost since I design server cluster architectures.

Most importantly, I could safely and confidently answer the question of “Can you act in a contract capacity?” with a firm, “Yes!” That flexibility alone is worth the cost of entry if it ends up being a slight net financial negative early on.

The only remaining concern I have is where to create the LLC. Illinois is generally regarded as highly corrupt, even if various websites rank it relatively high with regard to being business friendly. But I live here, so that’s the company’s primary place of business. Jen and I want to move anyway, but not too far from the Midwest due to family.

Do we stay in Illinois or use the excuse to branch out? Iowa’s an easy choice, though its business taxes are roughly double that of surrounding states. Missouri and Indiana rank better, but all I hear from Indiana residents is how awful the state is, and violent crime in St. Louis is the highest in the country per capita.

So there’s definitely a lot to consider. But at least there’s a plan for when I finally decide to pull the trigger. Did I miss anything? Have any suggestions? Let me know!

Until Tomorrow