Archives for June 2015

I recently mentioned the importance of choosing a specific structure for your business, and mentioned that it’s not a “one size fits all” situation. I thought I’d share my situation to illustrate how my experiences over the years have influenced my decisions on the business entity front.

 

The Beginning

I started doing freelance work a long, long time ago – basically working on the occasional project in my free time, while I was working a full-time job. Initially it was just a bit of fun, I didn’t really think of it as anything more. Then eventually, over the years, I began realizing I could actually build this thing up into a full-blown business.

But during this early phase, while I still had a full-time job, I started out as a sole proprietor, as do many small business owners.

This was the easiest option – it didn’t require me to set up a legal and formal business entity (which would need to be legally and formally dissolved if I later decided this whole gig wasn’t going to work for me). However, as you’ve now guessed from some of my earlier blog posts, it’s the least profitable for a business owner, and also offers no protection of personal assets in case of legal action.
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Starting out in Full-Time Self-Employment
Once I made the leap into full-time self-employment, I knew it was time for me to form a business entity. After discussions with a CPA, I was advised to choose election as an S-Corp, and that’s precisely what I did. Not only would it provide some protection of personal assets, but it would likely save me a lot (thousands) in taxes each year.

Fast-forward to the end of last year, when I relocated from Massachusetts to Indiana – I decided to restructure my business. Bottom line – I wasn’t happy as an S-Corp.
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Restructuring
My unhappiness arose mostly from the burdensome administrative work and record-keeping involved as an S-Corp. As ridiculous as it sounds, even as a single-member S-Corp, you’re required to set up a board of directors (yes, you’re all of them), file annual reports, hold directors’ and shareholders’ (again, yes, you’re all of them) meetings, and have the secretary (again, you) keep corporate minutes from each meeting (detailing who was present, the reason for the meeting, etc).

An attorney had taken care of all the incorporation paperwork for me, and had told me I’d need to hold regular meetings – including the obligatory annual business meeting (recording things like important decisions made through the year), followed by filing of the annual report, and also be sure to hold meetings throughout the year for things like big purchases (like equipment), or decisions to take on contractors, etc., etc. (basically “documenting” these events like a meeting, with minutes).

Sure, good record-keeping is important for all businesses, whatever the structure. But this all seemed really hazy to me – the Type A in me likes to know I’m doing things properly, crossing every t and dotting every i, as is legally required. Just being told to “hold annual meetings, and have meetings for other things during the year” doesn’t really constitute me feeling like I suddenly know what I’m doing as a business owner. I like SOPs and templates, they make me feel good about doing the job right!

Overall, all the administrative stuff, and the “not knowing” if I was doing things properly when it came to meetings, weren’t good for me.

So I used my relocation out of state as an opportunity to restructure everything. A couple of months before my move, I contacted a CPA in my new town. I’d found her after doing my research, and decided I wanted to take over my business accounts. She was clearly a CPA whose work was very focused on small businesses, and, after chatting with her on the telephone, I set things in motion for her to be my new CPA.

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The Best of Both Worlds

She gave me a lot of great advice by telephone, and as a result, when I eventually relocated, I chose to form an LLC but also filed Form 2553 to elect to be treated as an S-Corp for tax purposes. Although this offers the tax benefits of an S-Corp, my company is still legally structured as an LLC, and therefore requires a lot less paperwork and fewer ongoing administrative formalities to follow than does a corporation. Naturally, I still keep great records about my business transactions, but I don’t need to file annual reports, hold regular meetings, etc., etc. It’s all much less burdensome.

I’ve no idea why, but this option wasn’t presented to me when I initially incorporated my business. But I’m much happier now with the day to day administrative and record-keeping requirements – I feel like I know what I’m supposed to be doing!
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Some Interesting Articles For You
I recently saw this intriguing article in which an attorney discussed why he typically prefers an LLC over an S-Corp.

And here’s another, discussing some of the caveats to limited liability when you form an LLC.

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If you haven’t already done so, speak with a CPA or business attorney to figure out which option is a best-fit for your business.

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If you’re thinking of becoming a freelance medical writer (or freelance “anything”!), you’ll have to decide on your business structure. These articles here and here provide good, basic descriptions of the different legal entities, and their pros and cons, that don’t make your eyes glaze over.
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Deciding on a Business Structure

In addition to your net income, many factors will come into play in making this decision, such as the state you live in. Speak with your CPA or business attorney about what option makes most sense for you right now – there’s no single option that will work well for all freelancers. So it makes sense to seek professional advice about this, so you feel comfortable with whatever decision you eventually make. 

If you don’t already have a CPA or business attorney, it’s worth booking an appointment with one in your area, in order to get some good advice about your particular situation.

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Invoicing is something every business owner has to do – if they want to get paid!
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So, what’s the best way to go about this?
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Well, the bad news is that there’s no one way that suits everyone – but the good news is that there are numerous options available to you:

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Simple Invoice

Most small business owners tend to start off creating simple invoices using Microsoft. After all, when you’re just starting out as a freelancer, or you’ve just made the leap into full-time self-employment, you’ll be juggling a lot of things, and it’s unlikely that you’ll have every duck in a row when you need to send out your first invoice. So, creating a simple invoice using Microsoft is a quick and easy way to get the job done, without the need to make any decisions on what invoicing service you think you want to use long-term. Just be sure to include:

• Your Details:

  • Name or business name (the name that needs to be on the check they send you!)

  • Business address

  • Telephone number

  • Email address

  • Website URL

• The Client’s Details

  • Name of contact person

  • Business address

  • Telephone number

  • Email address
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• Invoice Details

  • Project details

  • Invoice amount

  • Issue date

  • Invoice number (use a numbering system makes sense to you)

  • Payment due date (you decide on this)

If you need some ideas for simple templates, you’ll find some free Microsoft templates here and here, among other places. Or even a variety of other free templates, such as this one.

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Invoice Systems

There are also numerous invoicing systems (software programs or online applications) that offer different bells and whistles – for example, some may allow you to track your time on projects, set up automatically recurring invoices, and send reminder emails when an invoice payment is overdue.

Some offer a basic free option in addition to their paid version. There’s no single best option out there – it’s a matter of what works best for you and your business.

If you’re just starting to think about using an invoicing system, you might want to check out a bunch of options to see if any seem like a best fit for you. Your might find this review article helpful – it discusses numerous options.

After unofficially polling friends and colleagues recently, some of the names that seem to pop up most frequently include:

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• QuickBooks (this may be especially useful if you already use it for your accounting)

• FreshBooks

• Nutcache

• Harvest

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I’ve been using Nutcache for a couple of years – I just use the free version and it suits me fine.

If you’re overwhelmed by all the options and don’t know which to choose, I’d advise just starting with a free system – or at least a free trial of one of the paid systems (just don’t forget to cancel if you don’t like it). You won’t know if a system suits your needs until you give it a bit of a test drive.

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Client Template

Alternatively, some clients might even ask you to use their own template – it may be the only form of invoice they accept. For example, I work with a quasi-Government organization that asks me to use their particular PDF template for invoicing. And I work with a CME company that requires me to submit “invoices” via their electronic system.

These are easy options because they’re both up-and-running – all I have to do is complete them. However, if you’re in a similar boat and are already using an invoicing system for everything else, just don’t forget to track the payment somewhere for accounting purposes. I keep an Excel spreadsheet that details all of my work projects for the year – so even if a project hasn’t been invoiced via my usual Nutcache system, I’ve logged it on the spreadsheet, so it’s tracked along with everything else for accounting purposes.

This is my Go To document for all my projects – it lists them all, along with information such as the contact person, project due date, date when I submitted the first draft, the date I submitted an invoice, the date I received payment, etc., etc.

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Hopefully this will help get you started if you’re trying to figure out how to set up your invoicing system!

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For me, one of the downsides of being self-employed is that I no longer get to “enjoy” the fact that my employer is in charge of deducting my taxes from my salary, and just providing me with a regular, net income each month. I enjoy the simple life, and being on the receiving end of a regular monthly payment in a job with a W-2 certainly counts as simple for me!

However, inevitably, self-employment brings many benefits, so the choice is a trade-off that I gladly take, and I just deal with the annoying book-keeping stuff as best I can. If you’re just starting out as a freelancer, and thinking about doing it full-time at some point – or if you’ve just jumped into self-employment – you’ll also have to deal with this kind of stuff.
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When self-employed, you’re not only responsible for paying your own income taxes, but also self-employment taxes. Self-employment taxes are basically your Social Security tax and Medicare tax. Typically, your employer would not only automatically withhold these from your paycheck, but also pay half of the amount, thereby reducing the contribution that you have to pay. However, now that you’re self-employed, the “employer’s half” now becomes your expense too, because you’re now also the employer!
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Check out this page on the IRS website for a good explanation of how this all works when you’re self-employed.
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These taxes represent a significant cost of being self-employed, and deter some folk from pursuing their dream of starting up their own business. However, they’re not insurmountable, and you can reduce them, depending on which legal business entity you decide to operate, but you should definitely be aware of them, and account for them in your financial business plan.

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