In the past, employees of large enterprises had careers lasting 20-30 years with the same company that would in return come with a company retirement or pension benefit.Times are different. In the U.S. today, there are 42 million formally identified freelancers which makes up more than 40% of the workforce.
75% of employees employed as freelancers/contractors/gig workers plan to start their own business at some point in the future.
When working as an Independent Contractor/Sole Proprietorship, the key word is flexibility. You can work as a freelancer or even run a physical, on the ground business. Depending on your career/businesses evolution, the lines of personal vs. business transactions/expenses can be blurred. That being said, it is always a good idea to keep at least a separate credit card designated for business expenses so that when the time comes to write off business expenses it isn’t overwhelming. As a sole proprietor, you can even write off a home office as long as certain IRS guidelines are met. Whether the business has achieved sustainability in revenue or the day to day operations have simply become too complex, these are typically good signs to start looking into the type of business to incorporate. Another good reason to consider incorporating is the potential for limited liability.
The difference between someone who is self-employed and a small business owner is that those who are self-employed typically do not have employees and do not hire contractors. Small business owners tend to hire employees and contractors.
There are many factors that come into play when deciding what type of business entity to create. It would be prudent to make this decision while incorporating the contractor’s long term intentions. Factors to consider are the type of professional practice, if you are simply an independent contractor, if you will be creating a product/hiring employees, or if you’re acting as a freelancer providing a service. Once this important decision is defined, the logical next steps would be to solidify routines of how your business will be tracking expenses, type of benefits to offer (retirement/health), how you plan on keeping track of/paying taxes (state/federal/self-employment tax), and to leverage the advice from an attorney/tax advisor.
Simplified steps to consider in creating and operating a small business
1) Determine, with the assistance of your attorney/tax advisor, an appropriate business type (LLC / S corp / partnership / C corp / single member LLC)
2) Apply for a Tax ID Number and other Tax Registrations
3) Register your Business Name
4) Open a business checking account
5) Establish a Business Record Keeping System (business credit card etc.)
6) Determine what type of benefits to offer yourself/employees (retirement/health, etc.)
7) Decide on what type of business expenses you can deduct (travel expenses/home office, etc.)
Consulting with a Small Business Banker can help you review account types for the business and the different services to consider to run your business.
As pension plans become a thing of the past, there is increased uncertainty surrounding retirement for contractors/small businesses. In addition to the phase out of pensions, many individuals that participate in the gig economy are not offered an employer 401(k) plan either. The end result of this is for the contractor/business owner to determine what type of Small Business Retirement Plan may best suit their needs.
Small Business Retirement Plan offerings
1) Small Business 401(k)
2) SEP IRA
3) SIMPLE IRA
Consulting with a Financial Solutions Advisor can help you identify appropriate retirement account types (when the time is right) and considerations in the decision. If working with Bank of America and Merrill Edge, a joint meeting can be set up with both a Small Business Banker and a Financial Solutions Advisor in order to address your needs.
Neither Bank of America, Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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