Becoming Your Own Boss (BYOB, 4.0)

In the first series, Becoming Your Own Boss (BYOB, 1.x) "Introduction, Today's Employment Picture", you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the next series, Becoming Your Own Boss (BYOB, 2.x) "Examining Your Situation", you answered some key questions to figure out if starting as an independent contractor was a good idea for you. In the prior series, Becoming Your Own Boss (BYOB, 3.x) "Preparing for Business", you examined the numerous topics (from taxes and insurance to your need for equipment and an office) that need to be considered before you take the step to establishing an independent contracting business.

This set of articles (BYOB, 4.x) covers the many requirements involved in operating a business. Some pertain to matters of law, but most pertain purely to assuring that the business will be effective, efficient, and profitable. If a business is not all three, it will not long remain a business, irrespective of who owns it or whether it is operated by an individual or by hundreds of individuals.

Reference Sources

References sources, of which this set of articles is one, will prove invaluable in establishing your business. As your parents no doubt said to you at least once, there is no point in "making your own mistakes". Instead, learn from others and profit from their mistakes. Basically, there are two sources of information that are available to you at reasonable cost:

Written reference materials (books, pamphlets, and periodicals); some free, some not; and

Counseling services; some free, some not.

Reference Materials: Among reference materials, the better books are written by people who learned in the school of hard knocks, so it doesn't really matter whether a book was a best seller. Even if it wasn't, the chances are that it will include at least a few tidbits that will fit your case. The best advice is to read, and read, and then read some more. If you spend a hundred dollars on books, and then spend forty hours reading those books, surely you will gain something. At least you will gain enough knowledge (even if it is only an insight into how other business people think), that it will save you a few of thousand dollars during your business life. If that is the case, $2000+ is not a bad return for 40 hours and a hundred bucks. Experience suggests that you will gain much more.

The following list offers a short selection of books appropriate for reading before you dive into the process of setting up your business. Most of these books are available from local sources. The point in including this short list here is to impress upon you again that you should take advantage of the education in hard knocks that was earned by others instead of doing it all for yourself. Obviously, this list does not include all of the appropriate books on the subject. There are many, many such books available from various sources today.

Starting and Operating a Business in (your state), from Oasis Press, a how-to book especially appropriate for new businesses.

Business Owner's Guide to Accounting and Bookkeeping, by Jose Placencia, Bruce Welge, and Don Oliver, from Oasis Press, basic accounting principles that relate to any business.

Financial Management Techniques for Small Business, by Art DeThomas from Oasis Press, essential components of sound financial management.

How to Succeed as an Independent Consultant, by Herman Holtz, from Wiley, another view of the how-to of independent consulting.

The Terrible Truth About Lawyers, and What They Don't Teach You at Harvard Business School, and What They Still Don't Teach You at Harvard Business School, all by Mark McCormak.

Beware the Naked Man Who Offers You His Shirt, and How to Swim With the Sharks Without Being Eaten Alive, both by Harvey Mackay.

In Search of Excellence, and A Passion for Excellence, and Thriving on Chaos, all by Thomas J. Peters and others.

Risk Analysis: How to Reduce Insurance Costs, by Gary Robinson from Oasis Press, advice on shopping for insurance, understanding types of coverage, and comparing proposals and premium rates.

Running a One-Person Business, by Claude Whitmyer, Salli Rasberry, and Michael Phillips from Ten Speed Press, a how-to manual on various aspects of running a one-person business.

Thriving on Chaos, by Thomas J. Peters, from Knopf, a treatise on learning to deal with a chaotic business environment.

What Color Is Your Parachute?, by Richard N. Bolles from Ten Speed Press, a practical manual for job hunters and career changers.

Tax and Business Handbook for Consultants and Clients, by Jonathan D. Wallace.

In addition to this list, you will find suggestions about books, pamphlets, and periodicals at appropriate points throughout the articles in this series.

Free Business Counseling Services: Should you feel the need, there are probably several free counseling services available to you. If you are uncertain as to the requirements for business in your state and local area, check the telephone directory or call the state or city information service number. Your state no doubt has requirements for business, particularly tax requirements, and probably has several pamphlets that cover the important points. Most cities have a committee or organization that offers business assistance services that are particularly tailored to new businesses. Many cities and states also sponsor economic development organizations. These organizations, however, are geared toward larger organizations that might produce jobs in quantity. As an independent contractor, you would not be considered as a logical candidate for providing hundreds of jobs for your state or area, but economic development organizations might offer advice, or pamphlets, or other useful information.

Also, don't forget the local community college. Most colleges offer courses on business. Some also offer advice, or perhaps even a course, on setting up a business. If not, perhaps, with a little digging, you can identify someone on the staff who will answer questions for you.

In addition, the Small Business Administration (SBA) of the federal government sponsors several organizations that offer advice to business people. The Service Corps Of Retired Executives (commonly known as SCORE) and the Active Corps of Executives both provide almost free counseling to the fledgling business person. If you cannot find the telephone number and address of a local SBA office, ask your banker to direct you to the nearest regional office. A telephone call to that office should start the process of determining if the SBA can help you.

And don't forget your friendly banker. Banks are obviously in business to make money, and therefore do not offer free services because that is simply not in the best interests of the stockholders. However, if they can help you with advice so that you will be more successful, they stand a better chance of making, rather than losing, money on your business, so they can sometimes help. If you have questions, don't be afraid to ask your banker. Remember though that bankers are, by nature, very cautious, so they will invariably caution you against risk, and this is not always in your best interests. Risk is inherent in business. Your task is to minimize it through judicious planning and careful operation.

Remember that advice is often worth just what it cost. Consider all advice very carefully, and don't build expectations beyond the capacity of the advisor.

For-Fee Business Counseling Services: There are available many counseling services for which you must pay. Some are even worth the money. Exercise extreme caution in selecting those to whom you pay money for advice. While it is true that free advice is often worth just what you pay for it, it is also true that paying for advice does not guarantee that the advice is worth what you pay. Having stated that, it must also stated that there are two for-fee counselors from whom advice is not merely prudent, it is necessary. These two are a tax accountant and an attorney. Choose these two people very carefully, learn to ask for advice when you need it, then heed the advice when you receive it.

Business Name

Selecting the name under which you intend to engage in business is the first step in establishing your business as an entity. You can use either your own name or a fictitious name for your business. Doing business under your own name, unincorporated, is by far the simplest method. You will probably not even be required to register the business with the federal, state, or local bureaucracy.

Using your own name is indeed the simplest; however, there are several distinct disadvantages. Most importantly, assuming that your name is reasonably attractive and is not very difficult to pronounce or spell, there is still little that you can do to add to its effectiveness in promoting your business and attracting clients (that is, unless you don't mind changing it to something like "John Software Engineer"). Further, it is almost certainly not very imposing as a business name, it does not add to your business stature, and it offers little assurance to the client that there will be no tax or other problems; that is, you appear somewhat less business-like and less serious about your business. If your name is very difficult to spell or pronounce, that is a further disadvantage.

Doing business under a fictitious name is somewhat more complex, but it does not have the disadvantages mentioned above. Choose the name carefully; it can help or hinder your success. If you choose wisely, it can be "catchy", it can appear and sound impressive, and it can offer some hint as to the nature of your business. If you choose badly, it can be ponderous, it can be pompous, and it can effectively say nothing.

If you intend to use a fictitious name (also referred to as DBA, or Doing Business As), it will be necessary to research the name for prior use by another entity. This rule is designed to preclude litigation stemming from name encroachment. In most states, this is done by the corporation department (or division) of the state government. In this process, you will be required to select a name, have that name checked (for a fee, of course) for current use by another entity, and then, if it is not already in use, register the name for each county/parish in which you wish to do business. There is usually a fee for each county/parish.

In this connection, it is important to remember that this registration does not give you license to do business in each county for which you pay the fee. It merely protects your DBA from use by another entity in that county (that is county, not state and not country).

It is usually not cost effective to register the name in all counties; that is, unless you intend to incorporate under that name in your state at some later date, or unless you select a name that is rather popular in similar forms. (If you select a name, but do not register it in all counties and someone else registers that same name in just one county, you will not be able to use it later as your corporation name. This is because a corporation name is registered statewide, not by county.) Regarding a name that is popular as is or in similar forms, we recommend that you not select such a name because of the risk of confusion among prospective clients.

Business Structure

Selecting the legal structure under which you intend to engage in business is the next step. Before you make the decision on structure, determine your state and local jurisdiction requirements for business. Remember that yours will not be a retail sales business. Thus, in many jurisdictions, a business license will not be required. The choices open to you are: proprietorship, partnership, and corporation.

Proprietorship - A proprietorship, sometimes called sole-proprietorship, is often the choice for the independent contractor. Dependent upon your personal style and the likes, dislikes, and requirements of your client base, a proprietorship might be appropriate for your entire business life. It is simpler than the other choices in that you need deal with fewer government bureaucracies, both in setting up the business and in operating it, and you need file only one tax return set. However, tax filing can be a challenge if you do not prepare very carefully and you do not keep good records. Your clients can use your taxpayer identification number (TIN, your Social Security number) for tax reporting purposes, or you can apply for a federal employer identification number (EIN) from the Internal Revenue Service. (If you wish to obtain an EIN, use IRS Form SS-4, available from the IRS and possibly from your accountant, to apply.) You can even subcontract work to other contractors. If you do not have important assets that can be attached in the event of a judgement against you, and if other considerations do not preclude it, a sole proprietorship will probably result in less complication in your life.

Partnership - A partnership is ordinarily not an appropriate choice for the independent contractor for two reasons. First, most independent contractors operate alone and so the concept of a partnership is irrelevant. Second, even if you elect to have a partner, the risks inherent in a partnership outweigh its advantages. It can be relatively simple to set up, but that is its only advantage, and it is, at the same time, its biggest danger. Unless it is set up very carefully (that is, not simply), its overwhelming disadvantage is that each partner can be held liable for certain classes of the other partner's debts. In the litigious climate that exists today, it is not worth the risk. A partnership is required to obtain a federal employer identification number for tax purposes, and its tax return requirements are relatively complex.

Corporation - Incorporation is the remaining choice. It has two distinct and very important advantages to the independent contractor.

First, incorporation makes you appear more substantial to a prospective client.

Second, and more importantly, larger companies often prefer to deal with a corporation because of the Internal Revenue Service rules on determination of employee status. (The reason is quite simple. As an incorporator, you are already an employee of a corporation, yours. This corporation is required to withhold taxes from your pay, which is of course the aim of the IRS.)

There are also two disadvantages: 1) It is somewhat more complex to set up and to maintain, and 2) It requires that you file an annual report and another set of tax returns. Therefore, its expenses are somewhat higher.

For most other businesses, incorporation ordinarily is selected because it offers to the owners some protection from liability. For the independent contractor operating as a single-person corporation, this is largely irrelevant. If your primary reason for considering incorporation is legal protection, incorporation as an independent contractor is probably not the answer. If you have questions regarding protection, it would probably be wise to consult with an attorney to obtain answers before proceeding further with setting up your business.

If you decide to incorporate, engage the services of an attorney who specializes in corporation law. In most states, incorporation can be done for a modest fee ($350 to $1000). It is suggested that you engage a corporation specialist because a simple mistake in setting up the corporation can cost you more than that much in taxes in one year. Your attorney will also apply for your federal employer identification number (EIN). Ask the advice of both your attorney and your tax specialist in deciding whether to set up a C or an S corporation.

Business Legal Address

If you have incorporated or otherwise registered your business, the legal address is the location that you used in that registration. (In most instances of corporations, the legal address is that of the corporation attorney.) The physical address of the place where you do the actual work might, but probably will not, be the same.

Business Mailing Address

For your business mailing address, you have four choices: 1) Using your actual office street address, 2) Using a post office box, 3) Using a combination of the above two, or 3) Using a mailbox service.

The box services are similar in function in that both simply receive mail, but different in the appearance presented to the public. The post office box is rented from the U.S. Postal Service and requires that you use the P.O. Box number as your address in order to receive mail there. The mailbox service is rented from a private company and requires that you use the street address of the service provider as your mailing address. In either case, you must pick up your mail at the box location. The appearance of the address is the primary difference; the second difference is cost.

NOTE: If you use a mailbox service, it is possible to advertise your mailbox in a fashion that might disguise the fact that it a box number. For example, you might advertise Box 100 as Suite 100. However, if a prospective client attempts to visit your office or otherwise discovers the deception, even though it is a small thing, it will reflect poorly on you. Do not be pretentious. Offer yourself as what you are.

Using Your Office Street Address: Using the actual street address of the office where you do the work as your business mailing address has advantages and disadvantages. The primary advantage is that clients and others, including mail carriers and delivery people, can find you when necessary. If you elect to use an office space away from home, there is an important disadvantage to using that address. It is that you must either be in the office during the business day or arrange to have the office tended while you are away. If you elect to use office space in your home, this disadvantage is largely removed by frequent availability of family members to tend the office. However, if you elect to use a home office, and you decide to use your street address as your mailing address, remember the precautions mentioned in "Where Should The Office Be Located?" in the BYOB, 3.2 article. There is no extra cost associated with using the office street address as your business mailing address.

Using A Post Office Box Number: Using a post office box as your business mailing address also has advantages and disadvantages. Early in the life of many businesses, the office location changes, perhaps several times, as the business matures and its space and other requirements change. If a street address is used, this requires changing cards, stationery, client's records, and so on, each time the office location changes. A post office box can provide address continuity so that many clients are unaware of, and untroubled by, such changes. Also, a box allows for delivery of only personal mail to your home address and only business mail to your business address, so there is no possibility of a family member misplacing or losing an important letter. The primary disadvantage is that you must remember to make that trip to the post office regularly and, if a package arrives that is larger than the box, the post office visit must be made during business hours. A second disadvantage is the appearance to some potential clients of being insubstantial. A third is that, although it is not terribly expensive, there is a modest cost associated with using a post office box as your mailing address. Post office boxes are available in several sizes, and the cost is dependent upon both the box size and the classification of the post office.

Post offices are classified according to several factors such as population, dollar volume, and others that are somewhat obscure and probably known only to the powers in the U.S. Postal Service. These factors result in the curious fact that the main post offices in Chicago, Illinois and Beverly Hills, California are both Class 1B. Perhaps it has something to do with congressional clout. New York is the only Class 1A office. There are 16 Class 1B offices, including cities such as Philadelphia, New Orleans, Houston, Denver, and others, including, of course, Chicago and Beverly Hills. Class 1C post offices include all offices that are not in Class 1B or Class 1A but still provide city-type mail delivery. Class 2 post offices are those in towns and other areas that have substantial populations but do not provide city-type delivery. Class 3 and Class 4 post offices are smaller, and are in mostly rural locations.

Post offices usually offer at least three box sizes; larger offices offer more. The smallest box (small letter) is approximately 3.25 inches wide by 5.25 inches high. The next larger size box (medium letter) is approximately 5.25 inches wide and high. The next larger size box (business) is approximately 11 inches wide by 5.25 inches high.

Using Both Street Address And Box Number: Using both a street address and a post office box as business mailing addresses is a popular compromise. There is still the required regular trip to the post office. And, if you put both addresses on your cards and stationery, there is still the problem if you move the office. But most of the other problems are solved. If an office move is probable, you might consider putting only the box number on the cards and stationery, and giving the street address to only those who need to know until the move is accomplished and it is time for your next stationery printing. There is no cost associated with using the street address as your mailing address. The cost for a post office box is usually nominal.

Using A Mail Box Street Address: Using the street address of a mail-box service provider as your business mailing address has the same advantages as using a post office box. It offers the same address continuity and the same assurance of not mixing your business and personal mail. It does not include at first glance the appearance of being insubstantial, but it obviously precludes client or other visits without explanation on your part. However, it does include the other disadvantages of the post office box. You must pick up your mail, you must pick up larger mail during business hours, and the cost of a mail-box service is significantly more than that of a post office box. Cost varies with the size of the city, the size of the service provider, and the services offered.

The next article in this series (BYOB, 4.1) addresses business communications, advertising, and your business cards/stationery.

To read the rest of the series click here