[post update] go indie 3

_posts/2023-08-16-going-indie-3.md

@@ -3,6 +3,7 @@ layout: post
 categories: [essays]
 tags: [series-going-indie, indie-dev, contracting, freelance, consulting]
 date: 2023-08-16T13:06:28+02:00
+date-updated: 2023-08-17T11:59:12+02:00
 title: "Going indie: business structure, taxes, and retirement"
 series:
     tag: series-going-indie
@@ -29,11 +30,11 @@ In all scenarios, you should open a new bank account for your business. It's als
 
 1. **Sole Proprietorship.** [[IRS](https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships), [Wiki](https://en.wikipedia.org/wiki/Sole_proprietorship)] A Sole Proprietorship is owned and run by one person and in which there is no legal distinction between the owner and the business entity. Being a sole proprietor is the simplest and easiest structure. You do not need to establish a formal legal entity. There is no paperwork or setup. You operate as yourself, as an individual, under your legal name. Similar to being a full-time W-2 worker, you file taxes using your social security number (SSN), etc. You can (optionally) "level-up" by getting a _Fictitious Business Name_ (FBN), which allows you to operate under a different "business" name. However, as the name indicates, this is not a "real" business entity. It merely provides a facade to your sole proprietorship, which can be useful in some situations. If you opt to have an FBN, then you also need to get an [Employer Identification Number](https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers) (EIN) to associate with it. An EIN is basically an "SSN for your business" --- you file your taxes using the EIN instead of your SSN and you provide your EIN to your clients for your 1099 forms. In addition to income tax, you also pay self-employment tax. You "pay yourself" simply by withdrawing or transferring funds from your business account.
 
-2. **S Corporation (S-Corp).** [[IRS](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations), [Wiki](https://en.wikipedia.org/wiki/S_corporation)] An S-Corp is a more formal structure that requires you to establish a payroll system and pay yourself a salary. You need an EIN and there is various paperwork to complete to establish the S-Corp entity. The process can take a couple weeks or up to 3 months, depending on your circumstances. It differs in that you can have multiple shareholders. An S-Corp is similar to a sole proprietorship in that it is a "pass-through entity" meaning the corporation's income and losses are divided among and passed through to its shareholders (i.e., you). In this scenario, you are the singular shareholder so you more or less file taxes like an individual would. However, S-Corps have access to additional deductions and can yield higher tax savings. Notably, an S-Corp is not a "full" corporation and alleviates you from double taxation where you would otherwise pay corporate tax as well as individual income tax. You still pay self-employment tax like a sole proprietor, and because you have to run a payroll system you also pay payroll taxes. You “pay yourself” via your payroll system. S-Corps also come with some additional fees and specific states impose their own taxes on S-Corps. Because of the additional fees and taxes, it usually does not make financial sense to establish an S-Corp until your annual earnings pass a threshold of around $100,000 --- at which point you are better positioned to reap the tax benefits. (Again, consult your accountant here.)
+2. **S Corporation (S-Corp).** [[IRS](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations), [Wiki](https://en.wikipedia.org/wiki/S_corporation)] An S-Corp is a more formal structure that requires you to establish a payroll system and pay yourself a salary. You need an EIN and there is various paperwork to complete to establish the S-Corp entity. The process can take a couple weeks or up to 3 months, depending on your circumstances. It differs in that you can have multiple shareholders. An S-Corp is similar to a sole proprietorship in that it is a "pass-through entity" meaning the corporation's income and losses are divided among and passed through to its shareholders (i.e., you). In this scenario, you are the singular shareholder so you more or less file taxes like an individual would. However, S-Corps have access to additional deductions and can yield higher tax savings. Notably, an S-Corp is not a "full" corporation and alleviates you from double taxation where you would otherwise pay corporate tax as well as individual income tax. You still pay self-employment tax like a sole proprietor, and because you have to run a payroll system you also pay payroll taxes. You “pay yourself” via your payroll system. S-Corps also come with some additional fees and specific states impose their own taxes on S-Corps. Also note that some states tax S-Corps as C-Corps, negating the pass-through benefit. Because of the additional fees and taxes, it usually does not make financial sense to establish an S-Corp until your annual earnings pass a threshold of around $100,000 --- at which point you are better positioned to reap the tax benefits. (Again, consult your accountant here.)
 
-3. **Limited Liability Company (LLC).** [[IRS](https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc), [Wiki](https://en.wikipedia.org/wiki/Limited_liability_company)] An LLC is what I know the least about, but my understanding is that it is even more formal than an S-Corp. It is an established business entity that you also have to file paperwork to legally setup, pay fees, get an EIN, etc. It is not a corporation but it is a legal form of a company. It is a hybrid business structure that can combine the pass-through taxation of a sole proprietorship with the limited liability of a corporation. Regulation of LLCs varies from state to state. I think LLCs also require a payroll, but I'm unsure. I'm not aware of any major benefits of an LLC over an S-Corp, especially if your entire business is only you --- a single individual. You most likely _do not_ need an LLC. It is also my understanding that dissolving an LLC is significantly more work than dissolving an S-Corp.
+3. **Limited Liability Company (LLC).** [[IRS](https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc), [Wiki](https://en.wikipedia.org/wiki/Limited_liability_company)] An LLC is what I know the least about. It is an established business entity that you also have to file paperwork to legally setup, pay fees, get an EIN, etc. An LLC does not need to have payroll. It is not a corporation but it is a legal form of a company. It is a hybrid business structure that can combine the pass-through taxation of a sole proprietorship with the limited liability of a corporation. Regulation of LLCs varies from state to state. LLCs generally have fewer formalities and reporting requirements than S-Corps, which can make them easier and less expensive to manage.
 
-My advice is: **do the simplest thing first.** If you are just getting started, operate as a sole proprietor. You do not need to complete any legal paperwork and you can start working immediately. This is beneficial because if you decide that you _do not like_ freelancing and contracting, then you can stop and go back to full-time work without having to do anything else. At the same time, if you _do_ decide to stay independent, then it is easy to transition to an S-Corp later. I have a friend that established an LLC once for a project that eventually fizzled out, and he said the process to dissolve it was a nightmare. He wished he had just gone with a sole proprietorship first.
+My advice is: **do the simplest thing first.** If you are just getting started, operate as a sole proprietor. You do not need to complete any legal paperwork and you can start working immediately. This is beneficial because if you decide that you _do not like_ freelancing and contracting, then you can stop and go back to full-time work without having to do anything else. At the same time, if you _do_ decide to stay independent, then it is easy to transition to an S-Corp or LLC later. I have a friend that established an LLC once for a project that eventually fizzled out, and he said the process to dissolve it was a nightmare. He wished he had just gone with a sole proprietorship first.
 
 Finally, one important caveat is that sole proprietorships do not shield you from liability, whereas S-Corps and LLCs do. For example, say something terrible happens and a client files a lawsuit against you. With an S-Corp or an LLC, your personal assets are protected. That is, the client is suing _the business entity_ and they can only go after the _business entity's assets_. If you are a sole proprietor, then the client is suing _you_ personally. Technically, that puts everything you own at risk of seizure and liquidation --- bank accounts, investments, property. **However** --- this is _extremely_ unlikely and especially rare in our line of work. You are not going to get sued for a software bug. (I mean, _maybe_ you could? But let's be real.)
 
@@ -95,7 +96,7 @@ In my experience, many folks are unaware that as a self-employed business owner
 
 With a 401(k), your contributions can be traditional (pre-tax) or Roth (after-tax). The difference is that traditional contributions reduce your taxable income, thus reducing the taxes you pay now. However, you will then pay taxes on the funds you withdraw during retirement. For Roth, you pay taxes now before making contributions and then when you withdraw funds during retirement, they are not taxed. The question to ask yourself is: _do you want to pay taxes now, or later?_
 
-The other popular option is a [Roth IRA](https://en.wikipedia.org/wiki/Roth_IRA). However, the maximum contribution for 2023 is only $6,500. As far as I know, you can have both a Solo 401(k) and an IRA. But if you must choose one, a Solo 401(k) is usually the better choice as it allows you to save significantly more.
+The other popular option is a [Roth IRA](https://en.wikipedia.org/wiki/Roth_IRA). However, the maximum contribution for 2023 is only $6,500. You can have both a Solo 401(k) and an IRA, if you want. Be aware that there are many rules and regulations regarding contributions. I do not recommend trying to setup these accounts on your own. If you must choose one, a Solo 401(k) is often the better choice as it allows you to save significantly more. However, paperwork for an IRA can be much simpler, so that might be a good start depending on your circumstances.
 
 For all of these important decisions, you should consult your financial advisor to make the choices that work best for you and your financial goals.
 
@@ -104,3 +105,9 @@ Finally, do I need to say it? [Taxatio](https://www.hexedbits.com/taxatio/) does
 ### Conclusion
 
 Today we covered some ugly, mundane --- but nonetheless important --- details of going independent. I hope this post was helpful if you are considering going independent. There is still more to come in this series. In the next part, I will discuss bookkeeping and invoicing! Stay tuned.
+
+{% include updated_notice.html
+date="2023-08-17T11:59:12+02:00"
+message="
+Many thanks to [Michael Tsai](https://mastodon.social/@mjtsai/110900729704601727) and [@ljmatkins](https://github.com/jessesquires/jessesquires.com/issues/186#issue-1853100101) for their feedback on this post regarding details about LLCs and retirement plans. I have updated this post to reflect their corrections and other notes.
+" %}