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foughtthelaw

Are you a business?

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In looking for info on the subject, I came across this post from a couple years ago where I mention being too lazy to set up a business for myself.

 

Well, just did my taxes and I've had 2 years as a freelancer that were good enough to make me think I'm probably either a. leaving myself open to unnecessary risk or b. paying more in taxes than I need too. Either way, I've had more than 1 friend tell me it's time to legitimize myself as a business and I'm inclined to agree with them.

 

There's a fair amount of text on the finer points of different businesses but I'd love to hear more personal accounts. So... I as you, freelancers of mograph.net, how have you structured yourselves (LLC, S Corp, C Corp)? Why did you go that route? likes and dislikes? anyone regret their choice and why?

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I highly recommend finding yourself a CPA. I can't stress not only how much less distraction you'll have in your life having to worry about taxes, but you'll also save so much money on taxes.

 

Every time I recommend it to someone relatively new to the industry, they laugh as if its a waste of money or too expensive. It's really not. My CPA has saved me from losing my mind.

 

In my experience talking to other incorporated freelancers, it seems like every CPA has their own reason for going LLC vs S-Corp vs C corp, so it will most likely be dependent on what route yours convince you to go.

 

Good Luck

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LLC since 2008 here. I'm not a CPA, but do use one, as well as a bookkeeper. Perhaps a different incorporation type would be better (I have been told to consider converting to an Inc.) but its a whole fiasco to change things at this point. I incorporated when I started freelancing only because I was under the impression I had to in order to freelance. I don't really shop-hop anymore, but having an established business entity helped me grow to get things like my office, business credit line, and business credibility with larger-sized 'direct' clients I probably wouldn't have been able to land otherwise. It allows for a DUNS number, business credit report, and other things like that which do come into play when applying to be a verified vendor to a medium-large sized business.

 

Any single-member (one person owns 100% of the shares) is automatically considered an S-Corp "pass-through entity" in taxes but its nothing you really have to make note of for when it comes time to check which box you'd like - just choose LLC if not going the Inc route. You, as an individual, will still be paying self-employment taxes on top of federal and state income. Self employment taxes seem fairly brutal @ 15%, but the only alternative is to put yourself on payroll and pay employment tax @ 17.5%. Those numbers may have changed a bit since I last looked, but I doubt any change could be anything significant enough to make the point invalid. Point is, incorporating does not reduce your personal income tax rates.

 

If you are looking to lower taxes, sadly, incorporating as an LLC can only increase taxes. Not by much, though. Really, only the state minimum corporate tax which is $800 / year in CA.

 

There are other costs to consider, though. City business taxes, which are at 1.5% in Los Angeles unless you fall under the creative exemption and gross receipts threshold. If an incorporated freelancer works on-site at the clients' location, legally they are supposed to require that they carry their own workers compensation insurance. Thats rarely enforced, but I consider having business insurance with a workers compensation package as a wise thing to have anyway. A minimum policy ($2 mil coverage with $35k / year workers comp for one person) runs about $1,200 / year. This will also be required if you want to start leasing office space, lease equipment, etc. There are other costs, but those are the ones that are on the top of my head now.

 

All of that said, there are plenty of reasons to do it, with one of the best things being how it forces you to do proper accounting. Its a pain in the ass, and takes a bit of time out of your week but the benefits of properly writing off expenses are enormous. You can write off things as a sole proprietor, as you do now, but a business entity may give a layer of protection and legitimacy from any suspicions the tax man may have.

 

I recommend it. It just forces you to think more like a business, which doesn't hurt.

Edited by AromaKat

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I was posing this question to an accountant friend of mine recently. The examples he wrote about helped me understand it better. Here is what he sent me:

 

"The main questions may be how much money you will be bringing in.

LLC can be either a sole proprietorship or a S corp. You can start as sole proprietor LLC and change to a Scorp at a later time.

-Sole proprietorship will be subject to self employment tax 15.3% (12.4 Social security, 2.9 medicare) of net business income (after expenses)

-S corp you will be an owner of a separate legal entity. This entity will have to pay you reasonable compensation and distributions.

the compensation is subject to self employment mentioned above but distributions will be treated as ordinary income(good thing). The question is how much money over and above what could/should be tagged as compensation is coming in. You have to pay yourself something reasonable. The other problem is you then have to file an s-corp tax return every year which produces a k-1 that goes to your 1040. This is an added time/ expense.

Examples.

S-corp

you make 50k doing 3 months work, reasonable salary for a motion artist doing your work is 60k so 15k for 3 months. Depending on how many expenses you have. lets say its 10k. So that leaves 50-15-10=25k. You would have 15 taxed at 15.3% + ordinary tax. then 25k taxed at ordinary tax only. then -expenses/time related to preparing s-corp return

higher expenses example 50k income-40k expenses= 10k income (reasonable salary = 15k) = 10k self employment income (no benefit over sole proprietor)

Sole proprietor

50k-10k expenses =40k taxed at 15.3% + ordinary tax

Higher expenses example 50k-40k expenses = 10k self employment income (same as s-corp above)

A single member llc which is the same as sole proprietorship for taxes but you get some limited liability. For taxes it will be disregarded and you would just fill out a schedule C.

The main purpose of the LLC is if you were worried about getting sued which I dont know how likely that is in your field, maybe copyrights or if you were taking out loans to do business.

Also it is often a good idea to open a separate bank account so it is clear what is business vs not.You can take profits out whenever but it shows business related deposits and expenses clearly."

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First, we'll echo the advantages of getting a good accountant, for taxes if nothing else. If you're in California, we really like Mark Varshawsky & Associates, who specializes in small businesses; he's taken care of us for years, as well as other mograph artists and companies.

 

Yes, you do want to become a "business" - there are some great tax benefits, including saving for retirement. It is best to have a separate checking account and credit card for your business - it will make accounting much, much easier. You can also have an "EIN" - employer identification number - so you don't have to give your personal SSN to clients etc. to get paid.

 

The way our accountant explained it to us was, S-corp has benefits if we feel our income was going to be really lumpy (huge one year, very low another) so we could move income across years to smooth out cash flow and tax burden. We chose to remain a sole proprietorship for many years, as it's less expensive and complicated. (A husband and wife can jointly be a "sole" proprietor.) We only recently changed to being a general partnership to better craft our retirement planning in terms of which of us was assigned more income etc. We did not choose LLC as we did not anticipate taking on large debts we might want shielding from in bankruptcy, or being in a position where we might be sued; we've stayed small, and self-financed all of our purchases. If you're a larger entity with employees, debts, and larger jobs, you may well indeed want to be an LLC or S-corp.

 

When you have a business, you are able to save a LOT more money tax-deferred than an individual can - check out SEP-IRAs and personal 401-Ks. And yes, you should really be thinking about retirement. You're probably going to need over a million to retire, if you don't have a pension or retirement fund from elsewhere. The good news is, you don't have to _save_ a million to retire - the earlier you start, the more it can compound and grow, meaning you need to put less in overall. (BTW, some also use companies as ways to play games with taxes to not pay Social Security etc.; that may only come back to bite you later when you need that supplemental income in retirement. And did we mention the need for a good tax accountant, esp. when starting out?)

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first off, Epic feed back, so thanks guys. Sounds like my "tax advantage" suspicions are fairly subjective.

 

All of that said, there are plenty of reasons to do it, with one of the best things being how it forces you to do proper accounting. Its a pain in the ass, and takes a bit of time out of your week but the benefits of properly writing off expenses are enormous. You can write off things as a sole proprietor, as you do now, but a business entity may give a layer of protection and legitimacy from any suspicions the tax man may have.

 

I recommend it. It just forces you to think more like a business, which doesn't hurt.

 

I am into forced responsibility.

 

Also it is often a good idea to open a separate bank account so it is clear what is business vs not.You can take profits out whenever but it shows business related deposits and expenses clearly."

 

the clearly separated finances is a big selling point. I do a pretty good job tracking receipts / deductible expenses as is, but having everything in one clearly separated place would make my life easier.

 

First, we'll echo the advantages of getting a good accountant, for taxes if nothing else. If you're in California, we really like Mark Varshawsky & Associates, who specializes in small businesses; he's taken care of us for years, as well as other mograph artists and companies.

 

//

 

When you have a business, you are able to save a LOT more money tax-deferred than an individual can - check out SEP-IRAs and personal 401-Ks. And yes, you should really be thinking about retirement. You're probably going to need over a million to retire, if you don't have a pension or retirement fund from elsewhere. The good news is, you don't have to _save_ a million to retire - the earlier you start, the more it can compound and grow, meaning you need to put less in overall. (BTW, some also use companies as ways to play games with taxes to not pay Social Security etc.; that may only come back to bite you later when you need that supplemental income in retirement. And did we mention the need for a good tax accountant, esp. when starting out?)

 

So, I'm sure everyone will be happy to hear that I've got an accountant already and have happily been working w/ him for a couple years. Crish I'm sure you'll also be happy to hear that I've been maxing contributions to a retirement fund since I was 21, in spite of not knowing why I was sacrificing an enormous chunk of my meager rookie salary (dad advice ftw). Right now I've got a traditional IRA I rolled my old 401k into that I'm maxing out every year. I'm certainly interested in bumping that up to the SEP-IRA.

 

Overall it sounds like I actually need to sit down w/ my accountant. for what I'd be doing an LLC is probably my best choice, but for the time being I'm not sure if there's much of an advantage too it in the immediate future for a shop-hopping freelancer like myself.

 

shit guys, you've done nothing to make the decision easier!

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From a UK point of view (and I'm only really passing on my understanding of what my accountant says):

 

* no tax benefit to becoming a Ltd company as a freelancer if you gross less than about £40k. Really you need to be grossing £45K+

 

* various VAT advantages (if you're VAT registered) including helping separate business purchases from personal in the eyes of HMRC.

 

* mortgage application advantages (because your Ltd company pays you in PAYE and dividends, so you have an 'official income' in the eyes of lenders).

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Over the years I have gone from a freelancer as an LLC, to a full time employee, to an Scorp, to a freelancer and back to full time. Here are a couple thoughts on what I have learned over the years.

 

If you are a freelancer it makes sense to at least be an LLC for taxes. If you are doing well and hiring on some help, then switching to and SCorp or at least filing as one makes sense, but you need to do payroll. What's really cool is you can stay and LLC but push the paperwork through to file taxes as an SCorp.

 

With a cheap bookeeper and paying payroll through Intuit or your bank once a month you can save a lot of money in the long run. Basically all that is required of an SCorp is that you pay yourself reasonable wages as a salary. So let's say for easy numbers sake, you make 100K in a year. If you did 50-60K as salary with a W2 and payroll you are taking home 40-50K as a profit sharing of the company and therefore are not subject to social security tax on that money, saving you both the percentage on that and the self employment tax on it.

 

Since we are technically in the business of motion picture production, you also qualifiy for the Domestic Production Act Credit on W2 wages paid to an employees. http://taxes.about.com/od/deductionscredits/a/domesticproduct.htm

 

This kicks back about 10% to you on the wages paid or 5K on a 50K salary that goes back to your business.

 

The cost of all this is relatively cheap as is only needs an hourly book keeper, quickbooks and payroll at about $50 a month if you run it monthly. Highly recommended for everyone out there.

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Since we are technically in the business of motion picture production, you also qualify for the Domestic Production Act Credit on W2 wages paid to an employees. http://taxes.about.com/od/deductionscredits/a/domesticproduct.htm

 

This kicks back about 10% to you on the wages paid or 5K on a 50K salary that goes back to your business.

 

holy crap! That one does me no good but I've got a couple friends who could really benefit from that.

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Over the years I have gone from a freelancer as an LLC, to a full time employee, to an Scorp, to a freelancer and back to full time. Here are a couple thoughts on what I have learned over the years.

 

 

Curious to know your experience from going from s-corp to full time. Did you have to dissolve your s-corp? Or have to jump through any hoops?

 

Sometimes I'm at a studio where I think "yea I could go full time here" but then I start thinking of all the headaches involved with being incorporated. I also sometimes work at a studio that only operates on W-2, rather than w-9. I haven't been able to find a work around to this except for just avoiding those places.

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It really was not a big deal to switch. I am still in the process of dissolving (waiting until after taxes) but you can usually also just refile your business status as well. I.E. -- you can switch from an scorp to an LLC or and LLC to an LLC filing as an Scorp. I would ask a local CPA though in your city/state as they usuually take care of that for me for about $150

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