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Becoming an Independent Contractor

On Behalf of | Dec 10, 2014 | Multi-State |

If you have ever thought of becoming an independent contractor, the following are some considerations to make before starting on what is essentially your own business:

· Independent contractors can generally choose how often and when they work.

· Independent contractors can make themselves available to hire bidders, increasing their profitability.

· Independent contractors can take advantage of applicable business income tax deductions and credits.

· Independent contractors should establish a bona fide business presence for several reasons:

o In order to take legitimate business tax deductions and credits.

o In order to advertise, thus increasing clientele and profitability.

o In order to establish a trusted presence in a professional field. Because of employment tax exposure, some businesses may only work with contractors who have separately-established businesses. In fact, if you are not properly established as a bona fide contractor, you could end up costing the business(es) you contract with significant cost in taxes and penalties for “misclassification.” (For more information on worker classification: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee, and http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee. )

Depending the location of your business, there are some basic steps to creating your own contractor business.

1. Choosing a Business Structure

2. Choosing a Fictitious Business Name

3. Registering for Taxes

4. Registering for Permits

5. Creating a Recognized Presence through Advertising

1. Choosing a Business Structure

This is a very important consideration. The “form” your business takes on can have an effect on whether you and your associates have personal liability for the debt or acts of the business. In order to best assess what form your business should take, you should consult a legal professional. However, below are some general guidelines, according to the California Governor’s Office of Business and Economic Development:

· Sole Proprietorship

A sole proprietor has complete control over the operation of the business, and is due all profits from the business, but is personally responsible for taxes and liabilities of the business. If a sole proprietorship is formed with a name other than the individual’s name, a Fictitious Business Name Statement must be filed with the county where the principal place of business is located.

· General Partnership

General partnerships consist of two or more individuals, bound by an agreement, oral or written, as to profit sharing, duties and responsibilities, management, etc. Partners are jointly and severably liable for the legal and financial obligations of their individual and concerted acts, as well has the negligent or wrongful acts that may occur in the course of business.

· Limited Partnership

Limited partnerships consist of two or more people, with at least one person acting as the general partner who has management authority and personal liability, and at least one person in the role of limited partner who is a passive investor with no management authority. All partners – both general and limited – must enter into limited partnership by either oral or written agreement.

· Limited Liability Partnership

In limited liability partnerships the partners must be licensed under California laws to engage in the practice of public accountancy, law or architecture. The partners have some protection from liability. The LLP is not a separate entity for income tax purposes; profits and losses are passed through to the partners and reported on each individual’s tax return.

· Limited Liability Company

Limited liability companies are has a separate legal existence and generally offers liability protection to its members. All members must enter into an operating agreement by either oral or written agreement.

The LLC can either be classified as a partnership or a corporation for tax purposes. If the LLC is classified as a partnership, the profit or loss flows through to the owners/members; the LLC is subject to an annual minimum state tax plus an annual fee based on total income. If classified as a corporation, it is treated like any other corporation and is required to pay tax on its net income, including the applicable minimum state tax.

· Corporation

Corporations are separate legal entities owned by shareholders who enjoy protection from personal liability. Corporations are taxed annually on their earnings; corporate shareholders pay individual income tax on these earnings when they are distributed as dividends.

A corporation is managed by or under the direction of a board of directors, which generally determines corporate policy. Officers manage the day-to-day affairs of the corporation. Shareholders do not participate in day-to-day management activities. Management structure can be altered by committees of board members and shareholder agreements. Shareholders generally are not personally liable for obligations of the corporation.

2. Choosing a Fictitious Business Name

A fictitious business name statement is required if the company name is different than your own. Fictitious business name statements are obtained through your local county Clerk Recorder office.

3. Registering for Taxes

Register with the state of California and the federal government for a Federal Employer Identification Number, and find out about corporate, payroll, income, and sales tax, as well as learn more about different tax assistance programs for small businesses.

4. Registering for Permits

The business activity type chosen largely determines the licenses and permits needed to operate a business legally. Keep in mind, business licenses are obtained through your local city and business entity registration is through the California Secretary of State.

5. Creating a Recognized Presence through Advertising

Advertising not only increases your exposure and profitability, but is legitimizes your business to the greater business community. As indicated above, if your business is scrutinized by the IRS or state tax agencies in regard to your status as a legitimate contractor, your clients may become liable for employment taxes and withholding for services you have rendered to them, if the tax agency determines that you are not a bona fide independent contractor. For that reason, many businesses will want to see your presence in your particular profession as separately established business.

Williams & Associates can assist you in choosing and creating the business structure which best suits your business.

For more information, please refer to the following web publications:




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