Don XML just wrote a post titled Perfect Time to Start an IT Consulting Firm?:
On the surface, joining up with a couple of your friends that
are well known bloggers and MVPs might seem the right thing to do, but
here are some random things that I’ve learned over the years about the
IT consulting business.
He goes on to mention a few great
reasons to be wary of creating a consulting company. Funny that
he’s posting about this now, because just yesterday I spent the better
part of the afternoon down at city hall registering a
new business entity to handle my consulting and other odds and
ends that I’m involved with at the moment. After doing a lot of
research, I decided to create a Sole Proprietorship versus an LLC or S-Corp. I made this decision for a variety of reasons. Here’s a few of them.
Taxes Are Roughly The Same
If you
intend to take all the "profit" in cash or draw from the company then
there is not much tax advantage to an LLC or any corp. I was a
little confused by the “Self Employment Tax” you have to pay as a Sole
Proprietorship, which is a whopping 15%. When I looked into this
however, it turns out that it’s the same Social Security and
Medicare taxes you’d be paying as as a corporation.
LLCs Don’t Provide Much Liability Protection Anyway
An
LLC MAY provide some protection, but if you are the sole owner
and make all the decisions, there might not be as much of a shield for
your personal assets as you'd like. Many suggest that if you’re
worried about liability, that you instead invest in a good liability
insurance policy.
Reporting Requirements are Easier with Sole Proprietorships
Everything
I read said that reporting is much simpler with sole
proprietorships. In fact, since all taxes pass through to your
personal tax return, all you need is TurboTax, and some easy way to
keep track of expenses. You will have to make estimated quarterly tax
payments, but TurboTax can help you with that.
Sole Proprietorships are Cheaper And Easier to Obtain
The
cost of creating an LLC in some states can be up to $500 per year, and
this doesn’t include any money you have to pay a lawyer or other
company to prepare the paperwork. With a sole proprietorship, all
you need is a business license. I obtained mine for about $75 and
it took about 2 hours at city hall.
Do the Research and Talk With an Accountant
If
you’re going to create your own business, my advice would be to do your
own research. You wouldn’t believe the crazy stuff that I’ve
heard from all sorts of business owners as I’ve been talking to
people. I’ve decided that no one really understands it fully, and that
your best bet is to do the research yourself so that you can
better understand the issues. If you really want to make
sure you understand all the issues, talk with an accountant.
If you’re setting up a business, good luck!
-Brendan