RUGBY

I worked for a major money-center bank my entire professional life (20+ years). In Dec 08, they severed me, with a decent package, so no complaints.

Recently, I was approached by a former colleague to work as a consultant on a 6-to-9 month engagement with the prospects of permanent employment.

The company is major insurance company who will not contract with 'individuals'. They suggested I establish an LLC or S Corp. Having worked for 'The Man' for 20 years, these entities are foreign to me.

I have reached out to my accountant/CPA for advice but would appreciate if anyone had insight into the pro/con of each type of entity. My primary concerns relate to tax advantages and limitation on my personal liability, although I'm sure I should be thinking about much more.

Thanks in advance.

Michael

rwheelz

There are so many factors, I have no idea what is right for you personally, but here is a place to start in terms of gathering information. I saw this site recommended on here in the past and bookmarked it:

http://www.score.org/index.html

Incubus

Go to a university bookstore and pick up a beginner Business Law textbook. Don't buy it, just jot down a few points about each type of corporation.

If you ask your accountant and your lawyer which to go with, they will probably give you different answers.

trackrat

listen to your accountant (my guess is that he will suggest an s corp.), but what i can offer is this:

be sure you do the mundane things like hold an annual meeting, keep minutes, pass resolutions ok'ing your salaries, n/p balances and rates, etc.

recently, liability protection has been diminished or dismissed in cases where the above type things were not done.

Also, if you ever want to purchase a vehicle and put it in the entity's name, form a seperate, new entity and put it in the new entity's name to further isolate any potential liabillty.

cthree

An S corp is a sole proprietorship with liability protection (i.e., you are a separate legal entity from the company). An LLC is the same but as a partnership.

You need to decide how you intend to operate. If you plan to bring on partners or investors at some point then you should choose LLC. If it's just for you as an individual to do contract work then you should choose S corp. The tax treatment is pretty much the same; profits flow through to you personally and the corp doesn't pay taxes itself and you avoid double taxation on profits as compared to a C corp.

You will have to pay a state franchise tax which varies from state to state but is usually a flat annual fee; $800/yr for California, $250/yr for Delaware, etc. You will need to register and pay the franchise tax in whichever state(s) you operate (perform the work) which means that if you register in NJ but work only in NY you are better off just registering the S corp or LLC in NY to avoid filing multiple state tax returns and paying multiple franchise taxes. It's pretty fuzzy but something to consider.

Some states don't allow registering single-member LLCs, I don't know about NJ/NY. You may not have the option unless you put down your wife or someone else as a member as well as yourself.

On a personal note you should absolutely register one of these entities. You will receive a very large tax advantage and the ability to deduct the vast majority of your work related expenses (travel, computers, office supplies, telephone, internet, automobile, etc) as well as a part of your household expenses (mortgage interest, power, water, gas, etc) for your home office which can be as much as 20%. You will end up paying half or less of the taxes you were paying as an employee.

Employees get absolutely screwed. I paid an effective tax rate of less than 10% when I was living in the US (usually 7-8%) because I work as an entrepreneur. Employment is the greatest barrier to wealth creation. It is designed to get you into the middle class and keep you there. Forming your own small business and working as an independent is the single biggest career advancement you can make. The "security" of employment is both a myth and extremely expensive.

There are a large number of professional associations you can join (tax deductible) which offer all of the benefit programs you get with traditional employment and a lot more including group health coverage at the same price an employer gets. Associations of 50,000 members or more offer great benefits, you don't even need to be a professional in the field to join. I belong to a professional sales association (for commissioned salespeople and reps) and get all of my benefit programs through them cheap. Look around, you'll find them.

Good luck

MurderS2K

hey mike, im in NJ as well and hella close. ive been in the same exact situation as your in my professional life. let me know if your ever down to meet and id explain some stuff. its just a lot to type here and im currently in the office.