Articles tagged with 'Business'
4 June 2018
A little over a year ago I described how I have my businesses set up in My Miniature Corporate Empire.
Between then and now quite a few things have changed, the biggest being that I'm now employed by egghead, which had previously been my primary consulting client.
Over the past few months it's become very clear to me that this W-2 gig is better in every practical way than how I had been operating.
There's no management overhead and far less worry about whether the next paycheck is going to happen.
The management overhead is still there, however, because the businesses still exist.
They're still sucking down energy and occupying mindshare that could better be used for, oh I dunno, chilling with my family.
Therefore, I'm shutting them down.
My remaining consulting client will switch me to 1099 status and the publishing business just keeps going with less overhead.
This post is a checklist of things that I have to do to shut down my two Michigan LLC S-corps.
It may not entirely apply to yours, or there may be other steps that you need to take.
Consulting with your accountant if this is something you're thinking of doing.
First, I have to assign my consulting contract from Okapi LLC to myself personally.
This is pretty simple, since there's no legal requirement for a form or anything, and my contract specifically allows assignment with notice and consent.
I emailed my client, said "hey this is happening on this date" and asked for acknowledgement.
I also need to figure out what happens with the copyrights for my books, websites, and code, but ultimately it should all come back to me.
It's just a question of whether I need to do anything formal.
Redirecting Income and Expenses
Next, I need to redirect income and expenses.
I opened a new bank account for my sole proprietorship and told PayPal, Stripe, and Dwolla to push payments there.
The account comes with a debit card which I'll be using for all of my business expenses, which are pretty limited.
Twilio, GitHub, AWS, and Heroku are the biggest offenders there.
Then there comes the glorious paperwork.
Here are all the forms that have to get filled out and mailed in:
- Articles of Dissolution for both LLCs. Fileable online with the state.
- Forms 940 and 941. These tell the IRS to close my payroll accounts.
- Forms W2 and W3. These tell the Social Security Administration how much I paid myself this year (not much).
- Form 966. This tells the IRS about the dissolution of the S-corp.
In addition, I'll need to do a final tax return for the parent company.
This should hopefully be straight forward since there wasn't much income and nothing tricky like health insurance or retirement contributions.
Once all of the above is settled I'll close each company's bank and credit card accounts.
Not hard, but it'll involve a few phone calls and a visit to the bank.
I expect this won't be happening until late summer because I don't want to do it until everything is settled.
Operating as a Sole Proprietorship Again
Our 2018 taxes will still be a tiny bit complicated because we'll have a simple K-1 from the parent business, but after 2019 forward it'll be smooth sailing.
If for some reason I decide that consulting is something I want to do again full time, spinning up a new S corp is simple now that I've done it a few times.
I might even use Stripe Atlas next time, since it comes with a bunch of perks and they do almost everything for you.
There's a certain amount of mourning that goes along with this whole thing.
I'm slowly acknowledging that thigns didn't turn out how I had planned, but also recognizing that that's ok.
Change is good.
29 April 2018
Your SaaS application should support SAML (Security Assertion Markup Language) if you're at all interested in big fat contracts from large enterprise customers. And why is that?
One word: money. Large enterprise customers pay quite a lot of money for services that help them do their work with a minimum of fuss. They want to do as little management of your service as they can possibly get away with, preferrably zero. If you can't make that happen, but your competitor can, guess who's not getting that big fat contract.
SAML is the technology that makes that happen. SAML came out in 2003, long before OpenID and OAuth and JWT and all those other, more modern, hipper authentication protocols. SAML is a stogy old goat based on XML and x509 certificates, which you may be familiar with because that's what SSL uses as well. It's supported by everyone that matters in the enterprise space.
When you set up SAML for your customer you're offloading all of the user management to their centralized system. They crypotgraphically vouch for users that they send your way which means all you have to do is find or create a user account for them and sign them in. No passwords, no email verification, no nothing. It's great for your customer because they get to manage everything on their end. It's great for you because you don't have to deal with any support requests related to passwords or usernames.
In summary: SAML == more money in your pocket.
7 June 2017
About a year and a half ago I started buying shares in individual public companies rather than buying
shares of index funds. I did this because I thought it was fascinating and because I thought I could
do a good job, at least matching the performance of the market as a whole. This week I decided
to end the experiment and go back to index funds.
This is part a chronicle of my brief journey and part my reasoning for both starting and ending the
15 May 2017
This post is mostly for posterity so I don't forget why and when I did this stuff. If you find small-scale business stuff interesting you'll like it.
When I initially published my first book Mastering Modern Payments in 2013 I just did it myself,
with no business backing it. I had a separate personal checking account where the Stripe deposits ended up, I deducted business expenses, and
everything was peachy. Then I got a not-insignificant consulting gig and I decided it was time to get a bit more professional.
The Birth of a Giraffid
In March of 2014 I set up Okapi LLC (because okapi have stripes, get it? ha ha).
Okapi became my central clearinghouse of everything business-y. Consulting payments and Stripe deposits came into it's business checking account
and cash came out. Later my accountant advised me to elect S-corp taxation, which ended up saving us a boatload
of taxes even though it cost a bit more to run. Consulting became my full time thing in September 2014 with steady payments from book sales supplementing our household income.
When my wife and I found out we were having a baby in late 2015 I got really into planning our family's future, including things like estate planning. Super-nerd levels of
One of the things that I was very concerned about was what would happen to the IP that I create when I die. Our estate planning attorney
suggested that I sign it all over to Okapi but that made me uncomfortable. What would happen if a client sued Okapi and won a judgement over my insurance
limits? They'd be able to get access to all of the IP that I worked so hard to create!
Okapi Spawns a Sibling
After talking things over with a handful of lawyers and my accountant I decided that the best solution to this (extremely paranoid) worry was to split
publishing and IP holding off into a separate business. We named it Cora Street Press LLC, after the first street that
my wife and I lived on together.
Cora Street Press is a bit different. Instead of just me owning Okapi, my wife and I own Cora as "tenants by the entireties", which is similar to
owning a checking account jointly with someone else, with some additional state-specific benefits.
It's also a manager-managed LLC, where I'm the manager and my wife is the backup.
Cora functioned well for half of 2016 and into 2017 when book sales started to finally slow down and overhead started becoming a big deal. It doesn't cost
a lot of money to run an S-corp but it's definitely not free. Those costs quickly became a big portion of Cora's revenue.
Cora Adopts a Child
Cora and Okapi are both S-corps so my initial thought was to just drop Cora's S-corp status to eliminate some overhead, but there are hard deadlines for that set by the IRS. You can't just elect and drop S-corp taxation willy nilly because that would a nifty way to cheat on taxes. It also wouldn't drop much
overhead because we'd still have to have Cora's taxes prepared as a partnership.
Here's where it gets weird.
It turns out that the easiest way to cut down on overhead while preserving the huge benefits of keeping consulting and publishing separate
would be to make Okapi a subsidiary of Cora. That way I only have to run one payroll each month instead of two, and the tax preparation costs are much less
because we're only filing one S-corp return instead of two.
The process was actually really easy. I filled out a little form that assigned my personal Okapi LLC
interest to Cora and then filed another form with the IRS that told them about the subsidiary relationship. Technically Okapi is now a Qualified S-Corp Subsidiary.
Day to Day
The day to day operations of these two busineses didn't change a whole lot. We do the bookkeeping separately but now most of the money flows from Okapi's bank account up into Cora's. We run payroll, pay for health insurance, and make 401K deposits all out of Cora's account now.
The biggest change is that I worry less. Future publishing will just happen through the top-level business, consulting and other "hot" liability things happen through Okapi, and future weird things can happen as additional disregarded LLC subsidiaries. Cora is now the lynchpin holding company of my little business empire.
17 September 2015
Let's say you do some consulting work once in awhile.
You do some work, people pay you, everyone's happy.
Now, let's say you want to make a living with consulting, like I did a year ago.
What do you need to know?
How do you set up an effective, legitimate business around your work?
I did over two years of research into how to set up my business properly, both to protect me and to save money on taxes every year.
There's an awful lot you need to know, and a whole lot of noise you don't.
My new book Handle Your Business gives you all of the good stuff and none of the noise in a succinct, easy to read guide.
Learn everything you need:
- What business entity to pick
- How to structure your contracts
- Where to get a business bank account
- The insurance coverage you need, and what you don't
- ...and more!
Handle Your Business is available today.
31 August 2015
A business is a legal fiction.
It only exists in so far as we and the courts believe it to.
It's an entity made of pure thought, even more so than a computer program.
When you write a computer program you're causing the computer to take physical actions.
When you form a business, you're literally willing a new thing into existence.
This may seem like a trivial point, but you only get the benefits of a business as long as other people believe it exists.
What are those benefits, you ask?
There are two big things you get by forming a separate business entity:
- limited personal liability for the financial liabilities of the company
- tax incentives
You could just start doing business as yourself.
You may have already.
You could, in fact, just ignore this whole chapter, and there's nothing really wrong with that.
But, you don't get those two things above.
For a freelancer or consultant, there's honestly not a lot of benefit to the limited liability portion.
Let's walk through a situation that might happen to you as a software developer.
You write a system for a client that processes credit cards, using the latest in PCI-compliant systems like Stripe or Braintree so you're not storing credit card data on the client's servers.
You do the best you can do to make it as secure as possible, but let's say there's a bug in the underlying framework.
An attacker gets into the client's machines and modifies your code such that it starts skimming credit card numbers.
The credit card company identifies your client's system as the source of the leak and shuts down their merchant account.
Your client sues you AND your business for negligence.
The liability shield built into the business might protect you, assuming you included the right language in your contract, but you're still on the hook for paying a defense lawyer.
In the chapters on Insurance and Contracts we'll talk about ways to protect yourself, but just know that the business, by default, isn't really there to protect against this kind of liability.
"Limited liability" is much more narrow than that.
It actually means you're not liable for debts the business owes by itself.
For example, if your business took out a loan to purchase something, and then fell behind on payments and ended up in bankruptcy, your liability for that loan ends at the amount of money you have invested in the business.
Unless the bank demanded a personal guarantee from you, of course.
In that case you're still on the hook.
The biggest boon when you have a separate business entity is the tax deductions available when you're operating for profit.
Businesses are taxed on their profits, not their total revenue (except in some states that have a gross revenue tax).
Here's some examples of things you can write off as a business owner that you can't when you're an employee:
- full cost of health care insurance premiums
- full cost of business insurance premiums
- mileage on your car
- new computer equipment
- phone and internet service, including web hosting
- meals with clients
- home office
Any expense the business incurs in the normal course of operations counts as something you can deduct in some way.
There are rules surrounding some deductions because they're been abused in the past, but for purposes of this discussion just know that almost every expense is tax free.
Types of Business Entities
Broadly speaking, there are three different types of entities you can start.
Sole Proprietor and Partnership
First you have the defaults.
If you just start charging people money for goods or services as yourself, you're by default a Sole Proprietor.
The buck starts and stops with you.
You reap all the profits from your business, and you're liable for everything your business does, because you are your business.
A partnership is the same thing except you have two or more people involved instead of just yourself.
Sole proprietors and partnerships are the original ways to do business, and they're the simplest to form (do nothing).
That said, they have a lot of drawbacks, especially around liabilities.
Thus, the corporation.
Story time: a long time ago people would get together and fund trade expeditions.
They would pool their money, take out loans, hire a ship and a crew, and send them out to find riches and trade routes.
Exploration is a dangerous game.
Sometimes (i.e. all the time) a ship would sink, the crew would disappear, and the banks that gave the group loans would demand their money back.
They would find the richest investor and demand compensation, and the courts would give it to them, sometimes to the point of sending investors to debtors' prison.
Investors were naturally hesitant to invest in new expeditions, because the risk of catastrophic loss and subsequent personal loss was so high.
So, they got together with their friends on the government and wrote down a way to limit their liability to just the money they put into the business.
A corporation is a separate legal entity from the owners.
It doesn't die until it's killed.
It can have bank accounts, buy things, sell things, and generally go about conducting business as if it were a sole proprietor, all while protecting the owners from their debtors. To this day, corporations are the most common form of formal business entity.
Modern corporations are great if you want your business to have lots of little shareholders or you want to retain significant money in the business.
They also come with all kinds of required formalities, like annual meetings, stock certificates, and other paperwork.
Corporations have to file their own tax return and have their own tax brackets.
This means you would probably end up paying taxes twice on some portion of your company's revenue, which is not ideal.
There are ways to minimize it, but consultants aren't looking for this kind of thing, so a corporation is probably not the best idea for them.
An LLC (Limited Liability Company) is a hybrid between a partnership and a corporation.
The owners enjoy limited liability without all of the paperwork that a corporation requires.
In trade, they give up the ability to sell shares to the public, among other things.
You can conjure up an LLC in 10 minutes by filling out a form and sending it into your state's Secretary of State along with the registration fee.
Bam. New company, born in less time than it takes to buy a cup of coffee.
The rules for the internal workings of an LLC vary by state, but the common ones are:
- File with the state periodically (some states are annual, some are every other year)
- Usually pay some sort of franchise fee or tax
- Don't commingled personal and business assets (i.e. have a separate bank account)
- Don't commit fraud
Every state's LLC law sets out default rules and then allows you to write an Operating Agreement to override them.
For all practical purposes, single-member LLCs like your baby consulting company can generally get by with the default rules or a simple agreement like the following:
Yes, you'll be signing a contract by yourself.
The point is that you have written processes in place for your business, which helps to enforce the notion in your mind and other peoples minds that the business is in fact a separate entity.
Remember, a business only exists if people believe it does.
Taxes and S-Corp Elections
By default, an LLC is a "pass through" entity.
The IRS doesn't acknowledge its existence, calling it a "disregarded entity", which means all of the revenues and expenses from the business flow onto your personal tax return and are taxed at the personal rates. Most states don't tax LLCs individually either, except for yearly registration fees, but some states like California have a tax on your gross receipts with a minimum of $800.
When you work for a business as a normal employee, the business reports what they paid you and how much they withheld for taxes to you and the IRS on form W-2.
There are three Federal-level taxes on a W-2: Federal income tax, Medicare, and Social Security.
As an employee, you only see half of the Medicare and Social Security taxes withheld from your paycheck.
Your employer pays the other half and gets to deduct it on their income taxes.
Each half of Social Security is 6.2% up to $118,500 in wages, and each half of Medicare is 1.45% on all wages.
As a business owner you are your own employer.
This means you get the privilege of paying both halves of Medicare and Social Security, which comes to a total of 15.3% on the first $118,500 in income and 2.9% of every dollar after.
You do get to deduct half of that when figuring how much is subject to income tax, but it's still a hefty bite.
Long ago the IRS decided to allow a special type of corporation, called a Sub-chapter S corporation, to reduce how much they pay for Social Security and Medicare.
When a corporation elects Sub-chapter S status they agree to certain rules, including pass-through taxation like a partnership or sole proprietor, limited number of shareholders, and rules about the types of stock they can issue and who can own it.
In return, they get to decide how much each owner gets paid as wage vs dividend and thus how much self-employment tax they pay.
The IRS allows LLCs to make this same election.
Here's an illustration, assuming $100,000 of taxable income and a reasonable wage of $60,000.
|Total SE Tax
By electing S-corp taxation you save yourself $6,160 in taxes.
Here's another example, this time assuming $200,000 in taxable wages and $140,000 reasonable salary:
|Total SE Tax
In this case you only save $1,740 because of the wage cap on Social Security.
As you can see, the benefits of S-corp taxation are massive when you have below $200,000 in taxable income per member for the year.
They start to phase out at the Social Security wage cap, but there are some big deductions you can take to keep your taxable income near that level.
Save for Taxes!
As you can see, as a successful business owner you are going to be paying taxes. Don't be surprised next April when you see your bill by making estimated payments each quarter. The IRS's due dates for quarterly payments are:
- April 15th
- June 15th
- September 15th
- January 15th
No, these are not calendar quarters, but I have yet to see a good explanation as to why
Stick them in your calendar with reminders so you don't forget.
How do you figure out how much to pay?
For first year, don't stress about it too much.
The IRS doesn't really care that you make uneven payments, just that you pay at least 100% of what you paid last year or 90% of what you need to pay this year by April 15th.
Also remember that if you or your spouse had a job at any point in the year you paid at least something in already, so you can subtract that out when figuring out an estimate.
For subsequent years you and your accountant can figure out how much your quarterly payments should be.
In sum, here's how you should organize your business:
- Form an LLC in your state
- Elect S-corp taxation by filing form 2553 with the IRS
- Save for taxes and pay quarterly
In later chapters we're going to talk about the other things you should do to maintain the separation between you and your business, including contracts, banking, and insurance.
8 May 2015
"I'm in deep with the IRS."
"We ended up owing $15,000 this year."
"I don't have that kind of money just laying around. How do I file an extension?"
Sound familiar? Maybe you're a freelancer. A consultant. An independent business person. Somehow, some way, you've got money coming in that isn't from a normal everyday W2 job.
One thing's for sure: you have to pay taxes on that.
Yep. Taxes. That thing you don't want to think about because other things are way more important, like actually running your business and bringing money in and buying groceries and cutting your toe nails.
Still, you have to pay them or the IRS gets cranky. Crankier than your two year old after a six hour car ride. Crankier than your cat is at the vet. Suffice to say, probably something you'd rather avoid.
It's your honor and duty as a citizen of the United States to pay as little as you can possibly get away with, but no less. As a business owner (because that's what you are, you lucky dog you) there are all kinds of tricks and deductions and things you can do to reduce what you owe, but that's a lot to think about and really that's why accountants exist and can charge so much.
The simplest thing you can do to avoid the IRS's ire is to pay what you paid last year.
Yep. It's that simple.
Look at your last Form 1040, find the line where it says "Total Tax" (line 63 on Form 1040, line 12 on 1040EZ), and pay that. Same with your state taxes, if you have state income tax.
Quarterly. Except not really.
Specifically, you'll divide up that amount from last year into four equal payments and send the IRS a check and a Form 1040ES (or pay online with EFTPS) on these dates:
- April 15
- June 15
- September 15
- January 15
If you notice, those are not equal time periods. The IRS likes to keep things interesting.
What if I'll make more this year than last year?
Awesome! High five! That's how you run a successful business.
Here's what I do:
- Set aside 30-40% of every invoice payment into a separate money market account.
- Every quarter, I pay the quarterly payment we figured out above from that money market account.
- At the end of the year, I send the IRS a check for whatever we owe on top of the quarterlies.
If you know how much you're going to be making you can do some math to figure it out and send in the extra on the quarterlies, but usually it's not worth it.
The percentage you set aside is going to depend a lot on your situation and location. For your first year it's safer to set aside 40% and then dial in the next year.
What if I'll make less?
No problem. If you know you're going to be making less, you can just reduce your quarterlies. Alternatively, you can just send the IRS some money every quarter. As long as you pay at least 90% of what you'll owe by the end of the year the IRS is happy.
But what if...
There there. It's ok. Taxes are complicated.
You still have to pay them.
25 November 2014
Your business has to get paid, but how that happens is a complicated question, and the modern payment landscape is vast. How do you pick?
What payment service is the best fit for your business?
This list highlights the biggest modern payment providers in the market, where "modern" includes features like integrated merchant account and gateway services, RESTful APIs, and well maintained SDKs.
You can use this list to help you narrow down the choices for your business.
8 September 2014
Over the last few weeks I've been playing an idle game called AdVenture Capitalist. In this game, you play a businessman, running his various businesses from the comfy environs of your plush green lawn (and eventually your moon base). I realized this morning that, perhaps inadvertently, AdCap teaches a few very important lessons for people bootstrapping or starting up a business.