Consulting after retirement questions

[Purron]

DH has turned in his retirement paperwork - effective March 1, 2011

He's received several offers of doing consulting work and thinks he might enjoy w*orking a couple of days of week for "mad money". Here's the question: What's the best legal way to set up this possible venture - LLC, S-Corp, or something else? Any other things we need to think about? This would not be a business we'd want to build up and sell later.

I'm just now starting to research this and would appreciate your advice and comments to steer us in the right direction. If it does happen, I'll be doing all the paperwork on it.

Thanks!

 

[lowflyer]

Since leaving my FT job in 2000, I ocassionally provide a service in a unique area where people will pay me by the hour for my time and expertise. I created an LLC as a way to organize my business. Most people simply pay by check, but sometimes I'll provide this service to a small company and they will issue a 1099 at the end of the year. Either way, each year I do a Schedule C under the business name as part of my personal taxes. Works quite well and I believe the LLC was only $130 to get going in my state.

 

[samclem]

In a nutshell, The primary advantage to an LLC is that it provides some protection to your personal assets if you are sued for something related to the business. There are other small potential advantages, but the people I know who have tried to pursue these have found them to be a PITA and hardly worth the trouble.

I'm a consultant and the only paperwork I did/do was:

1) Established a solo 401K through Fidelity (I'd go with Vanguard if starting today).

2) Signed a consulting agreement with my primary (actually, my only) customer. They send me a Form 1099 each year.

In some places, a business license or registration of the business name my be required, but I didn't need to do that. All my taxes are done on Schedule C of my individual tax return. It's very simple. Because the only thing I sell is my time, I don't even keep a separate set of business books. I suppose I might regret this if audited, but all my expenses are "reasonable and customary" backed up with receipts so I don't think I'd come out seriously damaged.

Wish DH best of luck, and feel free to PM me.

 

[lowflyer]

In a nutshell, The primary advantage to an LLC is that it provides some protection to your personal assets if you are sued for something related to the business.

FWIW, I understand the concept of an LLC "protecting" you in case you are sued, but I have always felt that when push comes to shove, if I'm selling my time to someone for a specific service and I screw up, LLC or no LLC, I'm exposed and may be liable for something. Note that my view is not based on solid legal advice, but rather perception based on many discussions on the topic. I do, however, carry a liability policy in my specific area just in case.

Specific to the original question, I see an LLC not so much as a way to protect me personally, but rather an entity in which I can do my little business. Along with a separate business checking account and a few other things unique to the business, I think it works well and is not overly complicated.

 

[braumeister]

samclem's reply is exactly what I do.
I like to keep things as simple as humanly possible, so a sole proprietorship is the way for me. My company name is my actual name. I put most of my earnings into my individual 401(k) at Fidelity, and file schedule C which lets me deduct business expenses.

This has worked well for me for a long time.

 

[deserat]

All of the above is good advice - I have an LLC that is registered in my home state - some customers issue a 1099, some don't. I do have a separate business checking/savings account that my customers can wire or ACH the funds. I don't do checks so much anymore if I can help it. I transfer any funds not needed for expenses in the business account to my personal account (sort of like a salary or commission). My investments are done from my personal account. I have a bit of a different situation regarding my income (foreign earned), soI have opted right now not to take advantage of the more generaous tax deferred percentages available for retirement investing. Nevertheless, most of what I earn is invested one way or another.

I track my expenses and income on a spreadsheet and scan all of my receipts. I do my taxes on a schedule C along with other forms for my specific situation. It works out well. I pay my taxes quarterly based on actual income and expenses up to that day of the quarterly tax submission. At the end of the year all is reconciled for my 'fiscal year' (which I use 1 Jan -31 Dec) on the Schedule C.

It's great - I love the freedom and I can turn down jobs that aren't interesting or that I don't believe I could do a good job for the customer.

 

[Ronstar]

Great question, Purron. I'm a member of a real estate LLC and a partner in an S-corp. I get K-1's from both that pass income/losses to me personally, so they are about the same there. But I believe there is tax favorability to the S-corp. Some of the 'income' in the S-corp can be retained and paid out as profit distributions without social security and medicare deductions. I don't believe this is possible in an LLC. But it seems like the LLC is simpler.

I have to do research on this also because I will probably form an S-corp or LLC for a personal business.

 

[chinaco]

Congrats.

 

[ronocnikral]

i know very little about incorporating. we looked into doing it for DW's business. our CPA discouraged it because of the level of accounting we would need to do. we have a lawyer friend who does corporations and business start ups. after talking with him for a few minutes, we landed at keeping a sole proprietorship for the following reasons:

1) simple accounting
2) we did not want to have to pay a franchise tax
3) cost of and filing paperwork (PITA) of incorporating
4) any protections provided by becoming an LLC could be offset by our state's homestead laws and a little insurance

FWIW, the contractors I work with (~$1500/day), a lot of them have set up an S-corp for some reason or another (something about $5x,xxx/yr tax advantage).

as samclem, we will start a solo 401k next year at vanguard (we spent this year topping off the Roths and boosting our savings).

bottom line, call a CPA.

 

[bizlady]

My dad was an attorney who specialized in business matters. Your situation is simililar to mine. An LLC will protect your assets if you keep ALL matters related to this seperate from personal. Get a separate phone line (prepaid cell phone might be most cost effective for you), separate bank account for receiving payments, and a separate checking or charge account for expenses. Set up carefully following the rules of your state. NEVER comingle finds, as this "pierces the shield" so to speak. Schedule C for taxes, and under his name is just fine. I would also recommend getting an
EIN (Employee Identification NUmber) for the business. This is free online and used in lieu of his SS for filing the taxes AND in the event he would need to provide a w9 to a customer.

 

[Animorph]

Sole proprietor, with solo 401k and Roth 401k at E*Trade. Fidelity didn't have a Roth at the time. All pretty easy to set up for $0. E*Trade fund minimums are smaller (though Fido free ETF's are nice too). I can stick all my income into the 401k up to about $30k and it has no tax impact for the year, or use the Roth if the income is not a problem.

 

[Martha]

If he wants to set up an LLC for liability protection, bear in mind that he is still personally responsible for his own negligence.

 

[chinaco]

About the request for consulting. He could go through a contracting/consulting company... Maybe someone can comment.... but I think the contracting/consulting company wold hold the general liability (unless there is some law broken). But that boosts the cost. His company will have to pay the consulting company their cut!

I would not FIRE if I needed to work. Since your DH made the decision... sounds like he does not need to work. But it may offer him the feeling of a safety net by easing out of a paycheck from a job.


I will probably be facing a similar situation. They would have to offer something very enticing to get me to agree. More than my salary... If I wanted that, I would just keep working.

 

[LOL!]

I've had a little free-lance consulting going for 25 years. As others wrote, I simply put the income on Schedule C as sole proprietor. I did not do any incorporation or LLC or have any extra insurance. I have no expenses since all expenses are reimbursed by my clients except when I buy a book or two or sometimes take folks out to dinner.

I do, however, have to file non-resident state income tax returns in the states where my consulting work is actually performed.

 

[Purron]

Thanks for the replies so far. In addition to the business structure, I'm interested in learning more about solo 401(k)s for sure. Here are a couple of sites I've found with helpful info from the IRS and SBA:

http://www.sba.gov/smallbusinessplanner/start/chooseastructure/START_FORMS_OWNERSHIP.html

http://www.irs.gov/businesses/small/selfemployed/index.html

 

[lowflyer]

Thanks for the replies so far. In addition to the business structure, I'm interested in learning more about solo 401(k)s for sure.

When I started my LLC, I set up a SIMPLE IRA right away and was able to put a good chunk of my income into that. I know there are several other ways to defer income for a small business, the SIMPLE seemed best for me at the time.

 

[Martha]

We do have a FAQ with links to threads that discuss retirement plans for the self employed:http://www.early-retirement.org/for...-and-those-with-multiple-employers-30751.html

 

[Purron]

We do have a FAQ with links to threads that discuss retirement plans for the self employed:http://www.early-retirement.org/for...-and-those-with-multiple-employers-30751.html

Thanks Martha! This will keep me busy for a while

 

[bright eyed]

Purron, has your DH made any moves since this last post? I'm looking into doing same either LLC or S-corp. Sounds like from what I've been reading, S-Corp has tax advantages in paying out via dividends vs all in salary like an S-Corp.

Also sounds like from others - that many of you are just doing sole proprietorships without incorporating - at what level of income is it recommended to incorporate? Since I'm just starting out I wouldn't have income or a high level for a while (who knows?!) so not sure how important incorporating from the beginning or doing later matters?

Also trying to weed out how health care costs/insurance etc factors into all of this...fun fun!

 

[Ed_The_Gypsy]

As noted above, an LLC may not protect you very well.

I have been working through a professional agency who takes a small chunk out of my check, but a smaller one when I find the work, provides professional liability insurance, does the paperwork and does the accounts receivable. One can do all that on one's own, but for a small cut, it takes a lot of the hassle out of consulting.

 

[Purron]

Purron, has your DH made any moves since this last post?

Not yet. He retired 3/1/11 and he's taking some time to chill. Plus, we're getting a house ready to sell. I'll keep ya posted!

 

[RockyMtn]

When I FIRE'd in 2009 I had my attorney set up a LLC for my consulting business. Wasn't looking to anything near full time but do have a few clients who basically pay to "pick my brain" on industry issues. Have also served as a witness in a couple of court cases. LLC, S Corp, Incorporation all have their +'s and -'s. Given I have no other employees currently, nor do I intend to in the future, I went with the LLC for its simplicity. Taxes flow through on my individual return, it was cheap to set up with the attorney and my home state. To cover potential liability issues I took out a umbrella liability policy to give me a piece of mind. Although given my consulting business basically covers giving companies my opinions it would be pretty hard for someone to come back at me for something I think! Now if I was offering technical advice on products, etc that could actually put someone in harms way I might rething the whole LLC thing to better shield the rest of my assets.

As for a way to boost retirement accounts and a way to shield money from Uncle Sam's claws I went with a SEP-IRA through Schwab. Very simple to set up and you can basically put in 20% of your income each year with a cap of $49k. The SEP is much simpler than some of the other options (solo 401k, etc) but does have some disadvantages in terms of how much you can sock away

 

[pimpmyretirement]

In his position, I would not consult without errors and omissions insurance. There are too many assets at risk, making the potential impact of a lawsuit too high.

 

[jayc]

As noted above, an LLC may not protect you very well.

I have been working through a professional agency who takes a small chunk out of my check, but a smaller one when I find the work, provides professional liability insurance, does the paperwork and does the accounts receivable. One can do all that on one's own, but for a small cut, it takes a lot of the hassle out of consulting.

I also work this way on most gigs. Some companies don't want to deal with individual 1099's and steer you to these places because they are already set up as a preferred vendor. The downside if paid with W2 is it is sometimes tough to shelter income because the 401K has a waiting period.