Starting Your Business

Consultant s Corner

Starting Your Business

The Legal Stuff

By Auri Rahimzadeh

Even if you re a subcontractor, there are many legal,financial, and marketing benefits to incorporating your business. Mostimportantly, incorporation provides limited liability, which means yourpersonal assets (other than the assets you have invested in the corporation)are protected from liability to third parties. Second, an incorporated entitysimply seems more legitimate. It will make it easier to land larger projects ifyou project an official and stable image. Perception can mean nearly everythingwhen you deal with larger organizations. There are a multitude of bases youneed to cover to get yourself properly incorporated. I m going to be somewhat general,so at the very least visit the Web sites I cite. And I strongly recommend youfind an accountant and an attorney, as well.

Incorporate

I ve heard it time and again, I don t need toincorporate. The reasoning often goes something like, I just pay myself a1099-MISC and have no liabilities like employees and such. This is unwise. Ifyou re not incorporated, all your personal assets are at risk if you get suedfor business-related matters. Incorporating properly and following certaincorporate formalities protects your personal assets from your business liabilities. If you get sued, the worst that could happen is that you lose yourbusiness; at least you can prevent being plunged into personal financial ruin,as well.

It s easy to incorporate; simply contact your Secretary ofState s office and register with them. In Indianathe filing fee is only $80! The forms are readily available, and many attorneysoffer these kinds of services for a relatively small investment. You will alsoneed to obtain a Federal Tax ID from the IRS,and many larger organizations you do business with will want your Tax ID. Yes,you can give them your social security number if you don t incorporate, butthat makes you look like a small possibly unreliable shop.

There s another benefit to having all your businessprofits flow through your corporation: the tax rate is often much lower. Payingyourself as a contractor can push your taxes higher than 33%, but dividendsfrom a business can be taxed at a much more digestible 18%. Still think incorporatingisn t worth it? Of course, individual tax situations vary,so check with your accountant.

Make Friends with Your Government

State governments and the Federal government offer amultitude of free resources to answer your questions and help you run yourbusiness. Each has different requirements for forms and processes your businessmust be aware of. Make friends with your government entities, especially yourSecretary of State and State and Federal tax departments. Their inner workingsare often complex, but they will usually have people available to address yourneeds if you take the time to work with them. Of course, these free servicesare not a complete replacement for an accountant or an attorney, but it willkeep you from having to pay someone else for every business issue that arises.

Pay Attention to Filing Requirements!

Once you take the formal step of filing incorporationpapers, you must follow some additional processes. These vary from state tostate, but generally include:

Your accountant and attorney can help with this. So cangreat Web sites like http://NoloLaw.com, http://AllBusiness.com, and http://smallbusiness.yahoo.com.

A corporation is a separate legal entity. If you don trespect the separate legal existence of your corporation, neither will the law.You can lose the liability limitations the corporation would otherwise giveyou. This is called piercing the corporate veil, and complying with corporateformalities is one important way to help prevent it.

Hire an Attorney

You will need an attorney, or at the very least to consulta Web site like http://LegalZoom.com or http://NoloLaw.com, to draft the following documentsfor you (at a bare minimum; requirements may vary from state to state, so makesure you ask your Secretary of State or other authoritative source which otherdocuments must be in your corporate books):

You should also develop a relationship with a qualifiedcorporate attorney. As your business grows, so does your need for an attorney,and they will be better able to meet your legal needs with an increasedunderstanding of your operations.

Getting Your Corporate Books in Order

You should keep your collection of documents, includingyour State and Federal Tax ID documents, Articles of Incorporation, etc., inone place. This is often called a Corporate Minute Book. Web sites such as http://BizFilings.com, http://CorpKit.com, and http://MinuteBook.com affordably provide MinuteBook Kits to help you keep all these documents organized. They come in bothplain and fancy bindings. The kits contain most of the basics, plus a few otherimportant items, such as Corporate Resolutions, Transfer of Stock certificates,and even a cool official embossed corporate seal.

Separate Your Finances

When your business is paid by a client, you must keep thatincome in a separate bank account. Remember that piercing the corporate veil I discussed earlier? Well, it s a big no-no to mix your business and personalfinances. Treat them as completely separate entities. The best bet is to haveyour personal and business accounts at separate banks. Business checking andsavings accounts are easy to open, although they usually have fees associatedwith them if your balances are small. Call the bank ahead of time to know whichdocuments you should bring with you when opening an account at a minimum they lllikely need the State Tax ID and Federal Tax ID certificates.

Hire an Accountant

Unless you re a CPA (Certified Public Accountant) by trade which is unlikely because you re reading a development magazine instead of aspreadsheet you need an accountant. A good CPA knows the ins and outs ofkeeping all your finances in order, and can handle your taxes at the end of theyear more effectively because they know your books. Accountants also can suggestways for you to save money, invest, grow your business, and more all whilesaving your business money.

You Need Insurance

There is no excuse for going without business insurance,whether you decide to incorporate or decide to remain a sole proprietor orunincorporated partnership. You never know when you ll find yourself needingprotection, such as from property damage after a heavy storm, or from legalliabilities from a rotten contractor. Your clients may even require you tocarry certain types of insurance before they ll let you start a project. Talkto a qualified insurance agent who can help you obtain the appropriatecoverage.

At the very least, you ll want business general liabilityinsurance, often called commercial general liability or CGL. However, in thesoftware business, you need better protection. This comes in the form of Errorsand Omissions insurance, which the insurance industry calls E&O coverage. Because E&O insurance usually covers defects in your code and, to a certainextent, the damage those defects may cause, this coverage will cost more thanyour basic CGL coverage.

If you work with a lot of Web sites, or even contentauthored by others, you may also want Trademark and Copyright (sometimes called Intellectual Property ) insurance to protect you from lawsuits arising out ofthe use of media elements you don t own. You also can mitigate this exposure byhaving all your clients sign a Consulting Services Agreement that outlinestheir liability for any media assets they provide you although you wouldstill be on the hook for any media assets you use for which you don t haverights. To be safe, make sure you always have permission to use the media youuse in your projects, regardless of whether you feel it should be free. In lieuof a Consulting Services Agreement, any engagement letter or statement of workshould have a clause stating the client represents they have permission to useall content on the site, and that they hold you harmless from any liabilityarising out of its use. Be sure your attorney reviews or drafts this languagefor you.

Moving Forward

Incorporating your business gives you many benefits and,done properly, should yield a higher payout to you while protecting yourpersonal assets. You also will likely gain the ability to lure bigger fish, whooften require businesses to be incorporated and have policies against workingwith individual contractors.

While getting started and staying on top of thebureaucratic requirements may seem daunting, it s actually all pretty easy,with lots of Web sites, government agencies, attorneys, and accountants to helpyou along the way. As your business grows, these tasks will actually becomemore transparent. Get started today!

I m excited aboutthis series, and I want to make sure I m addressing your needs. If there s atopic you would like me to cover, or you simply have questions, please don thesitate to e-mail me at [email protected].

Auri Rahimzadeh is President and Senior Engineer at TAG(The Auri Group, LLC, http://www.aurigroup.com),a Microsoft Gold Certified Partner based in Indianapolis,IN. Rahimzadeh has authored three books, including Hacking the PSP and Geek My Ride.He has been technical editor on Wrox and Wiley titles, and has written a numberof technical articles ranging from .NETdevelopment to consumer electronics. Auri started his technology career workingfor Steve Wozniak, co-founder of Apple Computer, and enjoys writing andteaching others about all sorts of technology.