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Comment by nickjj | Hacker News Reader

I've been remote freelancing for ~20 years. Some good advice in that post but I would add in:

1. You definitely don't need to form an LLC. I'm still a sole proprietor all this time and it's working out fine.

2. Personally, I'd hold back 35%+ of your income for taxes and expect to pay taxes every quarter.

3. 2 months of savings seems really low. People are wired different but I know a lot of people (myself included) who can't function with less than 6 months of runway when being self employed. It's not fun being in a position to take on low quality work because you absolutely need it.

4. Billing style really depends on the job you're doing. A lot of my work is billed hourly due to the nature of what I'm asked to do.

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>> You definitely don't need to form an LLC. I'm still a sole proprietor all this time and it's working out fine.

This is bad advice. It has worked out for you so far because, I'm willing to guess, you have not been put at risk for any sort of substantial liability.

Forming an LLC creates a separate legal entity which is itself responsible for its own debts and liabilities. It isn't expensive or difficult to form an LLC, and you don't need a lawyer to do it. For most US states, it's a short form and an online payment.

There are some important rules to follow to ensure that your LLC will be viewed by the courts as a separate entity from yourself in the event that some potential liability arises. Perhaps the most important rules is to separate the finances of the LLC from your own personal finances. It's easy to open a checking account for your LLC - someone at your bank can help you do it. When clients pay you, make sure the check is written to your LLC, not you. Pay yourself from the LLC account - don't use the LLC's debit card for personal purchases and expenses. The goal is to create a clear line of separation from yourself and the LLC so that if someone sues, liability stops at the LLC and does not extend to your personal assets.

Much of the advice given in this thread should be qualified with "at least in the US". For example, the liability problems are much less of an issue in the EU, and forming an LLC equivalent in most countries will not protect you from liability if you are the sole owner and you manage the company.

Personal liability is absolutely still an issue in the EU as well.

But will the same solution protect you?

When I was considering it here in Germany my tax advisor told me a UG[0] will mean a lot more bookkeeping and associated higher costs compared to remaining a sole proprietorship & that it will practically not likely to have any benefit in my case[1].

I can imagine less bureaucratic countries like the US & UK impose less of an overhead tho. For the life of me I can't understand why the German authorities are so resistant to entrepreneurship.

[0] https://en.wikipedia.org/wiki/Entrepreneurial_company_(Germa...

[1] I was doing game development consulting for various small companies, something I guess is unlikely to really get me sued?

In the UK you want the Ltd.

Sure, if you destroy a customers data on purpose, limited liability isn't going to help you. For a mistake, an Ltd with insurance is what you want.

If you're dealing with any reasonble amount of money, such as £40k+ per year, it's also more tax efficient.

It’s less tax efficient in Germany until a much higher threshold

"Personal liability" is an overly broad term. In the EU a single baseless lawsuit does not bankrupt you, so if you feel you have your finances under control, it might turn out that sole proprietorship is not a problem at all.

This is what I meant by "liability problems are much less of an issue in the EU".

> 1. You definitely don't need to form an LLC. I'm still a sole proprietor all this time and it's working out fine.

I did this for a while, but it starts to hurt around tax season. There are advantages to being incorporated and then hiring yourself as an employee for a minimal wage. With the way you're doing it, you're paying employment taxes on your entire income. With an LLC, you can pass the majority of it through without paying that.

> 2. Personally, I'd hold back 35%+ of your income for taxes and expect to pay taxes every quarter.

That would be the responsible thing to do. I just end up paying yearly, paying the interest penalty, and using January+February+March for taxes. Probably should get my house in order at some point.

> 3. 2 months of savings seems really low.

Agreed.

> 4. Billing style really depends on the job you're doing. A lot of my work is billed hourly due to the nature of what I'm asked to do.

Yes, but I do pretty much everything I'm able to not bill hourly. Fixed Budget > Monthly Rate > Bi-Weekly Rate > Weekly Rate > Daily Rate > Hourly.

Please correct me if I'm wrong, also I assume you are in the US...

    I did this for a while, but it starts to hurt around tax season. There are advantages
    to being incorporated and then hiring yourself as an employee for a minimal wage. With
    the way you're doing it, you're paying employment taxes on your entire income. With an
    LLC, you can pass the majority of it through without paying that.

So you are paying corporate tax rate on the profits of the company, then personal tax rate on your "minimal wage". How does the money from the company get passed to you without any tax hits?

He's likely an llc taxed as an S-Corp. You don't pay taxes out of your business, profits after write offs are added to your return with a K1. You're likely thinking of a C-Corp.

Yes, that's exactly it. As an S-Corp the corporation doesn't pay any taxes. Well, in my case my state (New Jersey), has a minimum tax based on revenue. I pay that, but it's minimal. If it really bothered me, I could re-incorporate as a Delaware or similar LLC. All profits are passed to your individual return and you pay taxes on that.

With the K1, you will be adding the passed through income to your personal income and still paying tax on it. I'm not seeing the benefit of an S-Corp here.

See my comment here: https://news.ycombinator.com/item?id=19527078

> I did this for a while, but it starts to hurt around tax season. There are advantages to being incorporated and then hiring yourself as an employee for a minimal wage. With the way you're doing it, you're paying employment taxes on your entire income. With an LLC, you can pass the majority of it through without paying that.

I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes. That means your tax treatment is the same for an LLC as it would be if you were a sole proprietor without an LLC.

The reason to create an LLC is to separate your personal assets from your business assets and to protect you from liability for your employees actions. If your LLC signs the contract, in most cases the client can only go after the business, not you personally.

However, almost all lenders require a personal guarantee and an LLC doesn't protect you from your own negligence. Only from the negligence of your employees.

So basically - LLCs are unnecessary if you are the only employee.

See: https://www.nolo.com/legal-encyclopedia/limited-liability-pr...

The tax benefits come from electing to be treated as an S corp for tax purposes, not from establishing an LLC per se. But as far as I'm aware, you need to establish an LLC or other corporate entity in order to be taxed as an S corp.

It's true that creditors can come after your personal assets if you personally guarantee a corporate entity's debt. But establishing an LLC does limit your personal liability in any instance where you don't provide a personal guarantee. I suspect that many individual freelancers who establish LLCs never take on debt or other liabilities that require personal guarantees.

> So basically - LLCs are unnecessary if you are the only employee.

This is not true for many reasons, primary among them being taxes and healthcare.

I'll explain taxes below. For healthcare, I use Trinet as an HR provider (since I am a company) and they allow me to get benefits (including healthcare) at corporate rates. You need to be incorporated for them to even talk to you.

> I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes.

Happy to explain. When you are self-employed, you pay SECA taxes on your entire income.

https://www.investopedia.com/terms/f/fica.asp

For self-employed, that means both the employer and the employee portion. Let's say you pull in 300k. You're going to pay SECA taxes on all of that.

If I create an LLC, do an S-corp election, then retain myself in the LLC for say 50k, I will only pay those taxes on the 50k. The other 250k will be passed through to my personal income and I will only be responsible for the standard income taxes.

Thanks for sharing.

1. I'd be terrified to run as a sole proprietor for anything more than getting started. I work on medical software, and if someone dies during a procedure - even if it's not my software's fault - I don't want my personal assets to be liable.

2. I started at 35%, and moved back once I saw what I was actually paying. Depends on your state in life, state within the US, and charitable giving state-ments.

3. Yep, 2 months is low. Just enough to weather a storm, but more = better.

4. Funnily enough, I'm switching to hourly billing for much of my work. But I think many freelancers (particularly US-based) don't even realize "day rates" are a thing - we're fixed on hourly pay, for some reason.

What does "day rate" usually imply in US, 8 hours?

You get my productive output for normal working hours, typically an 8-9 hour range, but I'm not tracking time spent on potty breaks, eating lunch, or taking a walk outside.

I think this shows the fixation on hourly rates. Why does there need to be a translation to hours.

A day is a day. When I was freelance I just billed a day rate. The point for me is that I simply don't count the hours. It just meant I would spend the day working on that clients project only. Typically I'd do something like around 9-17:30, with around an hour for lunch. So that works at 7h30. But sometimes I stopped earlier. Sometimes I worked later. I still billed the same.

I never pro-rated the invoices for partial days. My minimum billing increment was half a day on the odd occasion I needed to run an errand that was going to require less than a full day off.

I'm asking because I'm thinking about how working part time fits into this scheme. Half-day billing seems like it would be a good match.

That is what I do. Have a daily rate, but can bill half a day.

I don't really do classic 'projects', I'm more an ops guy having seen/experienced the dev side too, and profiled myself as being a bridge between those 2 sides that don't always fully understand each other. At a client I'm usually involved in multiple projects and 'the bigger picture'.

You cannot place an estimate on 'fixing' stuff like that, and it also hugely depends on the internal politics. My contracts are usually for 3-months, and can be extended 3 months at a time, which define a daily rate, state a day is 8 hours, and I can bill a maximum of 40 hours/week. Contractually I cannot terminate the contract, only the client can - but I can simply decide to stop working for a client, and simply don't bill them until the contract expires.

This allows me the flexibility to work for multiple clients, bill half days, work when I want, and can stop working for someone if I decide it's not working out for some reason.

From 4 to 8 hours depending on someone's productivity on a given day.

If you are a one man LLC, most likely just having an LLC will not protect your personal assets.

https://info.legalzoom.com/owners-liable-llc-3298.html

> Members can also be held personally liable for court judgments against the LLC if the member has personally and directly injured someone or caused financial loss in the course of business, or has knowingly done something illegal or reckless.

> ...

> Courts usually require three elements to be present before they will allow the veil to be pierced and a member to be held liable for the financial losses of an LLC. First, the person bringing the lawsuit (the plaintiff) must show that the LLC was controlled and dominated so completely by the member in question that the LLC was a mere instrument of that person and indistinct from her. The plaintiff must then show that a breach of duty occurred -- for example, that the member committed fraud or failed to keep adequate records. The final element is that the control and the breach of duty must have caused injury or loss to the plaintiff.

Those aren't very high standards if a successful lawsuit is lobbed your way for software you have been contracted to right.

Edit: Not that using an LLC isn't a good idea, I just think the "legal shield" benefits are often overstated and misunderstood.

The "breach of duty" condition as defined there seems awfully ambiguous given that that article doesn't detail what duty is owed. Nolo [0] restates the same condition as:

> The company's actions were wrongful or fraudulent.

which seems like a fairly stringent requirement. Though it also notes [1]:

> [Single member LLCs] are also susceptible to "piercing the corporate veil," which occurs when the courts find that the entity and the owner are not really separate and thus the owner is personally responsible for the business’s debts. The easiest way an opposing party can prove this is by demonstrating a lack of adherence to the LLC operating agreement or that the operating agreement is riddled with errors.

which seems like a more significant concern for well-intentioned freelancers.

[0] https://www.nolo.com/legal-encyclopedia/personal-liability-p...

[1] https://www.nolo.com/legal-encyclopedia/single-member-llcs.h...

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