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#1 snoj  Icon User is offline

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Starting a business: An unexpected journey.

Posted 24 July 2013 - 10:37 PM

This is something of a "what I've learned" as well as a "wth do you guys do yourselves?" thread. While I am putting some personal info here (salary) for the sake of the article and others to learn from, don't feel like you need to. I have searched some here on DIC specifically, but most seems to be bits and pieces of the following or folks looking to earn some extra money.

DISCLAIMER: EVERYTHING HERE IS NOT TAX OR LEGAL ADVICE. TALK TO PROFESSIONALS IN YOUR AREA FOR INFO AS IT PERTAINS TO YOU.

Earlier this year some events happened and, at the time, some I was hoping would happen soon that I decided it would be best if I started my own corporation. I was approached by a gentleman who found me through github and liked some of my work there and the other (which has yet to happen) was a local company looking to expand their software product.

So I contacted a lawyer friend of mine to ask about which type of corporation I should do. With the research I had already done, I had figured I'd best be served by registering a Limited Liability Company. It would allow me a lot of flexibility for taxes in that I could basically treat the company's money as my own in the eyes of the IRS. This type of corporation is sometimes called Single Member LLC (SMLLC). He thought so too and agreed to get the Articles of Incorporation I needed to file with the state (Minnesota). Basically the documents outline things like voting and who or what can make decisions. In my case, it seems pretty boiler plate language. So I forked over 250 something dollars (~$150 for the registration, $100 for his time, and lunch on me), I had my license by the end of the day.

Now that I had these papers in hand I went to the bank to open an account. I had planned on using my own Social Security Number to open accounts and for taxes (in my case SMLLC's can do this). However the banker I met with advised that it would be better to have an EIN (something like a SSN for corporations). By doing so, he said that it would make for a better case should there be financial troubles, my family's assets wouldn't be in as much risk. I had considered getting one for these reasons, but since it's the IRS, I figured it would be weeks before I had the number and I wanted to get the ball rolling. These were dispelled by my banker. He told me that you could call and the most amount of time Id probably spend on the phone would be about 20-30 minutes, most of which would be waiting to talk with someone.

So I went to the IRS site and looked for phone numbers and what information I'd need to an EIN. It turns out, you can do so online. Within minutes I had an EIN. So I called up my banker and arranged another meeting to open an account.

Meanwhile I needed to find a bill rate. I know, probably an elephant in the room, money usually is. To get me started I did a google search which unfortunately, really only turned up "how to calculate your bill rate", not what others actually are charging. So I started working it out.

First I took some information from a gig I interviewed for several years ago. The target minimum billable time percentage I was expected to do was 60%. Roughly this is 1200 hours a year or almost 5 hours a day. Since this is my own business, I'm figuring that I'll need to spend more time on customer relations than I would otherwise, I put this down to 50%.

Using the percentage, my current take home as a base and some rough percentage to figure taxes and benefits (30%) I worked out that just to pay myself the same take home wage, I'd need to charge ~$65/hr. This doesn't take into account general monthly expenses like internet and hosting, conferences, hardware, or other things.

The things I know about and could find costs for:
  • Build and Node.js conferences spec'd out: 15K (priced at bringing wife & kids along and w/o per diem)
  • General office expenses: ~7.5K/yr. (cell phone, internet, hosting, email, MS licensing, etc.)
  • Hardware: 12K/3yr or 4k/yr. (laptop, 2xNAS for redundant storage, the like, all on 3 year replacement cycles)
  • Savings/slack: roughly 20% of revenue


This is an extra 24K a year. While things like conferences are nice, they aren't utterly necessary so they could be chopped. But I still want to go and so I still am going to budget for it. This stuff minus the savings brings us to about $90 an hour.

Calculating savings gets a little tricky. Besides that by adding 20% of $90 doesn't doesn't equal 20% of $108, I'm pretty sure savings are not considered an expense that can be written off come tax time. This I figure would mean about $125-130k total would be necessary.

So, taking the 1000 hours I figure I could realistically bill, that means I have to charge $125-130/hr to satisfy the budget I've set...and I've not really given myself a raise. Though I suppose one could argue about the conferences and taking the family along could be a raise of sorts.

While I've spoken to a some folk about this, half don't have an issue and the other think the amount is crazy (not in a I'm overestimating skill or experience, as far as I call tell).

TL;DR: I'm looking at charging $140/hr. Am I off my rocker?

This post has been edited by snoj: 25 July 2013 - 08:55 AM


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Replies To: Starting a business: An unexpected journey.

#2 jimblumberg  Icon User is online

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Re: Starting a business: An unexpected journey.

Posted 26 July 2013 - 12:16 AM

One of the problems I see with your current "business plan" is that it appears that you only have one client. How can you be an "independent consultant" with only one client? One of the biggest things the IRS looks for is this independence. Independence means setting your own schedule, supplying your own supplies and equipment, etc. Any time there is an appearance that the client is setting the schedule or supplying items proving your independent status becomes much more difficult.

Another issue you seem to be missing is health care costs. Remember as an IC you will need to provide this as well. So, don't forget to add these costs to your billing computations.

Quote

TL;DR: I'm looking at charging $140/hr. Am I off my rocker?

That really depends on what services you'll actually be supplying. Normally hiring an independent consultant will cost much more than the salary of an employee. The independent consultant normally needs to bill at a higher rate to cover the added expenses of running a business.

Also you will always need to insure you keep the business expenses separate from the non-business related expenses, don't by that gallon of milk using the business accounts, and don't pay for business related expenses with the "home account.

Having a home office can be quite complicated. This is another "flag" that the IRS looks at when dealing with independent contractors. The office, and it's expenses should be kept as separate as possible from the rest of the house. For example how often is the internet used for non-business purposes? What about that cell phone, is it only used for the business? Any time you have items that have dual use you will probably need to separate the charges.

And the following also pertains to my post.

Quote

DISCLAIMER: EVERYTHING HERE IS NOT TAX OR LEGAL ADVICE. TALK TO PROFESSIONALS IN YOUR AREA FOR INFO AS IT PERTAINS TO YOU.



Jim
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#3 snoj  Icon User is offline

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Re: Starting a business: An unexpected journey.

Posted 29 July 2013 - 10:40 AM

Thanks for the reply Jim.

Quote

One of the problems I see with your current "business plan" is that it appears that you only have one client. How can you be an "independent consultant" with only one client? One of the biggest things the IRS looks for is this independence. Independence means setting your own schedule, supplying your own supplies and equipment, etc. Any time there is an appearance that the client is setting the schedule or supplying items proving your independent status becomes much more difficult.


All this work of registering the business and trying to figure out a rate is to prepare for the possible local client. In the mean time, I'm still employed elsewhere and have been looking for other clients. The possible local client's project will be several years at least, both from the initial work and ongoing improvements/maintenance.

Quote

Another issue you seem to be missing is health care costs. Remember as an IC you will need to provide this as well. So, don't forget to add these costs to your billing computations.


This I've calculated in the "base" of ~$65K (base/1000 = $65/hr) which covers wages and benefits (including healthcare). Basically this is the barest sum I figured I'd need to generate to at least keep my current standard of living.

Quote

Also you will always need to insure you keep the business expenses separate from the non-business related expenses, don't by that gallon of milk using the business accounts, and don't pay for business related expenses with the "home account.

Having a home office can be quite complicated. This is another "flag" that the IRS looks at when dealing with independent contractors. The office, and it's expenses should be kept as separate as possible from the rest of the house. For example how often is the internet used for non-business purposes? What about that cell phone, is it only used for the business? Any time you have items that have dual use you will probably need to separate the charges.


Should this become my full time work, I do plan on renting an office to better separate expenses. However for the time being, things will have to stay in my home in the puny corner bedroom/office. Things like internet at home, I will likely just pay for it from my personal account and treat using it like one would a coffee shop (but without the expense account paying for the coffee).

Thanks again Jim!
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#4 no2pencil  Icon User is offline

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Re: Starting a business: An unexpected journey.

Posted 26 August 2013 - 08:56 AM

View Postsnoj, on 25 July 2013 - 01:37 AM, said:

Though I suppose one could argue about the conferences and taking the family along could be a raise of sorts.

You'll need to factor in many family time forfeits first. There is more going into this than just your time. No one is going to value your time as much as you do. The wife will not always be willing to forgive client time, & vise-versa.

There is way more give than take in the beginning. The grass is greener effect. You see the positives, but not yet experience all of the negatives.
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