DBA, LLC, Sole-Proprietorship, S-Corporation, or Something Else? 1

[Maui]

I have an opportunity to perform consulting work for an out-of-state corporation. My current full time employer has given me the green light to proceed with this project (and I have it in writing) provided that I do not utilize any company owned resources, to which I have agreed. In order to provide engineering services I have to be licensed in that state, and I have since obtained my PE license there. Since I am also licensed in my state of residence (NY), I should be in good shape legally. I will NOT be involved in any type of civil engineering, or building construction whatsoever. This is a consulting position for process-related engineering projects in a manufacturing operation.

I am still putting together the consulting agreement (nothing has been signed yet except an NDA). I have the ability to set up my own separate company for this purpose if I choose to. My accountant suggested that I simply use my current tax ID number and perform the consulting work as a DBA for tax purposes. She felt that it wasn't even worth the trouble of getting a separate DBA number, much less establishing a separate company. I'd like some recommendations from the members of this forum who have traveled this route before me, and would like to learn from your experiences, both good and bad.

The topic of insurance has come up, but for this particular type of work, I have a very difficult time justifying getting it. After the project ends (in 1 or 2 years) I would simply cancel the insurance. And from what I understand, once the policy is cancelled, you aren't covered for anything that might occur. So you either walk into it deciding to pay for the policy for the rest of your life, or you just don't get it in the first place. Your thoughts?

Maui

http://www.EngineeringMetallurgy.com

 

[MiketheEngineer]

I have been doing business for over 20 years as a sole proprietorship - works for me.

Lots of peopel will say that incorporating will save you from geetting sued and losing all your assets. Myabe - but if you are in the personal service business - like we tend to be - no big help. Your best bet is to accept jobs only from people you know and trust....

 

[woodman88]

When I was looking at doing engineering on the side, the insurance guy said I could do a buy out on the policy. That is, when I wanted to stop the insurance I would pay reduced payments yearly down to a minimum to maintain the coverage for that time I was working. Adding this cost put me out of the market for now.

Garth Dreger PE - AZ Phoenix area
As EOR's we should take the responsibility to design our structures to support the components we allow in our design per that industry standards.

 

[zdas04]

Maui,
Keep hold of that accountant, she seems to be a gem. When I was talking about starting my business, I spent some time with an attorney and his point was that a company is not allowed to defend a P.E. from a technical suit. So if you go to the (fairly small) cost and (very large) accounting burden of doing business as an LLC you are protecting yourself from near zero-risk suits (e.g., someone tripping over your threshold and suing you) and not at all from real risks. He recommended sole proprietorship like MikeTheEngineer mentioned.

Then I went to an accountant who said that I had to incorporate or he wouldn't accept me as a client. Two other accountants said similar things. I organized as a sole proprietorship and do my own accounting and taxes. Right decision for me.

Insurance is either a personal risk-tolerance or a contractual issue. If it was just up to me, my risk-tolerance would say "No P&L or Liability Insurance". My problem is that all of my clients require a policy in place and most want to be on the policy as co-insured or at least an explicit waiver of subrogation. If your contract doesn't require it then it falls back to your risk tolerance.

David Simpson, PE
MuleShoe Engineering

"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.

 

[Maui]

zdas, she is good. I've been with her for about 10 years, and have no reason to look elsewhere. The insurance issue comes down to what I thought it would - what is your risk tolerance? And along those same lines Mike brings up a good point to only do business with people who you know. I do know these people (which is why they asked for my help), and that brings the level of risk down in my mind. I may insert a clause in the contract regarding limited liability on my part to further reduce my exposure to any unforseen risk if I think that it is warranted.

Garth, the insurance root just seems to be a endless money pit. I think that I will probably move forward without it if I can.

Thanks everyone for the suggestions.

Maui

http://www.EngineeringMetallurgy.com

 

[lacajun]

I have an agreement with an engineering firm which offered to cover me on their insurance, if I didn't want to get it.

Pamela K. Quillin, P.E.
Quillin Engineering, LLC

 

[swertel]

I went the single-member LLC route. I chose this options because there isn't any extra accounting overhead beyond what I would want to do to keep my business balance statement separate from my personal accounts. My taxes for the LLC show up on my Schedule C.

Because I have a full-time job and work very little on the side, the deductions in my paycheck cover my federal and state liabilities. If that wasn't true, I would have to make quarterly tax payments.

If you are looking for contract paperwork, I highly recommend the EJCDC contracts from NSPE.

http://www.nspe.org/ejcdc/index.html

Because my jobs are small - quick time frames and small dollar value, I use the short form E-520. There are hold-harmless and indemnity clauses in there. I limit my liability to the amount they paid me for the job. But, I'm also in the situation where I don't do any public works. If I was a full-time employee for the companies I work for, I would be industry exempt. The designs I work on are used in the manufacturing environment and their in-house engineers check everything and have final approval.

--Scott
www.wertel.pro

 

[zdas04]

If there weren't reasons for various forms of company there wouldn't be so many.

David Simpson, PE
MuleShoe Engineering

"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.

 

[Maui]

Scott, thanks for the link. Is there any way to determine at least in part what the content of the various contracts are that are listed? For example, they charge $100 for the E-520 contract for NSPE members (I am one), but there are a lot of other contracts as well that cost as much or more. I'd rather zero in on the one that's right for my sitiuation before shelling out a lot of money for ones that I wouldn't end up using. I'll give NSPE a call and see if they can provide me with some direction. Thanks.

Maui

http://www.EngineeringMetallurgy.com

 

[swertel]

I didn't find one, so I bought the bundle E-990. Spent $250 (member price) and got over twice that worth in contract documents. I personally read through them all, and for most (aka all) of my projects I will only use the short form. That's why I recommended the E-520, based on the type of work and who you are working for from your original post.

But for an extra $150 more, it may be worth investing in the future of your company. For no other reason, reading through all the other contract language taught me quite a bit about the types of things to watch out for. $150 was a cheap continuing education investment.

--Scott
www.wertel.pro

 

[swertel]

P.S. At the time I also bought the E-991 set, just in case I ever needed to farm out some consulting work myself. For the opportunity you described above, this set of contract documents wouldn't apply.

--Scott
www.wertel.pro

 

[MiketheEngineer]

I generally don't use a contract (not saying that is right) but just a firm handshake and a look into their eyes. Works for me.

 

[MiketheEngineer]

Yeah - and I know Andy Griffith died today.....Times were different back then!!

 

[ThermoCivil]

I went the LLC schedule C route. My wife is a CPA so that helps. I also help her in her accounting business (don't ask). Do not do a S corporation at the start because it cost more to do a tax return. In addition, S corporations limit to 65 shareholders. And for the love of God, do not do a C corporation now. The IRS taxes professional corporations (lawyers, architects, accountants, ect) a flat tax rate of 35 percent. Plus, you suffer from double taxation as well. I do not recommend sole proprietorship because you want to keep your business assets separate from your personal assets.

If you have a gain in your business I recommend doing quarterly tax payments. Also check with your state for their individual requirements. Once your business picks up, you might want to pay yourself a salary (see average salary for department of labor) for a fair figure that will not be disputed in case of an IRS audit (audits for self employed are usually at a higher rate).

I have not bought insurance yet, but I will because I plan to be a subcontractor to other companies. Even though in Florida you principal house cannot be taken from you if you get sued.

 

[zdas04]

I've found that separating personal and business in a Sole Proprietorship to be reasonably easy, you just have to have discipline and make sure that you have adequate reserves for bad income months and future business capital requirements.

The double taxation thing is not as real as it appears on the surface. The corporation has revenues. The corporation has expenses (one of which is your salary). When you net them there is a profit (or loss) and the corporation pays taxes on that net WHICH DOES NOT INCLUDE THE SALARY YOU PAID YOURSELF. Then you pay personal taxes on your salary just like anyone else. You have to file two forms, but the total tax is about the same magnitude as I pay as a sole proprietor.

On the other hand, a Sole Proprietorship has revenues and expenses. You net the two and treat the difference as income for the proprietor and pay taxes on that. My marginal tax rate (taxes divided by gross revenue) hovers around 20% of gross.

David Simpson, PE
MuleShoe Engineering

"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.

 

[jgailla]

zdas,
Just out of curiosity, does the 20% include Social Security and Medicare taxes?
Or are those paid only on a nominal salary you pay yourself?

 

[zdas04]

God,who knows? On 1040 SE you figure all that stuff, but part goes back to the 1040 as an adjustment to income and all of it goes to line 56 as a tax. It is kind of like the scene in "Big Trouble" where the bad guys get to the airport and can't figure out if they're "Arriving" or "Departing" because they're "arriving at the airport to depart Miami".

I just know that at then end of the tax marathon every spring Turbotax displays a number that is in the neighborhood of 20%. I've always accepted that number without digging into it since I'm not going to do anything different because of it.

David Simpson, PE
MuleShoe Engineering

"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.

 

[DRWeig]

My experience echos zdas04, but mine is an LLC with 2 members. Mine is just about 25% total, which does include self-employment.

Double-taxation on a C corporation is related to dividends. You have to pay corporate tax on the dividend amount (since it's part of the profit before taxes), then again on your personal income tax when you receive it. It doesn't come into play with professional C corps, though, unless they're financed with private equity. As a sole shareholder (or as a few of you), there's not a requirement to pay dividends that I know of.

Somebody correct me if I'm wrong.

Good on ya,

Goober Dave

Haven't see the forum policies? Do so now: Forum Policies

 

[zdas04]

Dave,
That is my understanding too, but why an LLC or the other sorta-corp. would pay dividends is beyond me. I'm sure that there are good reasons (paying venture capitalists back maybe?) they just escape me.

David Simpson, PE
MuleShoe Engineering

"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.

 

[DRWeig]

I haven't looked at the tax rules in ages, but in the old days, if you accumulated too much cash in a corporation (or other liquid investments), the IRS could designate you to be a holding company and force you to pay dividends. My reading was in the 1980s (from my accountant) and the limit at that time was $250,000.

Otherwise, I have no idea why anyone would do that unless, as you noted, investors demand it.

Good on ya,

Goober Dave

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