Scaling up — Business & Tax Structures

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People coming from various backgrounds non-profit freelancers who have incorporated recently as S-Corps, LLC co-op.

  • Various legal entities include, but are not limited to
    • Individual (sole proprieter, no formal incorporation generally required)
    • LLC
    • S Corp
    • C Corp
    • B Corp

Some are also variations that exist on a state level, also subtypes that exist on a state level, and also based on size, if you need to provide benefits, or other business arrangements that provide the best, conditions for your employees. Example: NY has a cooperative corporation entity that organizations can use.

While we're focused on business entities we shouldn't rule out other structures like 501(c)3 depending on what provides you the most benefits down the line and in the future.

It's possible for some orgs to transition from one entity e.g. from LLC to S Corp. But focus is on free lancers going to a formalized entity. Most people go from individual to LLC and then to other structures. Depending on your income for those who make more than 80k yearly there are benefits to becoming an S-Corp (or an LLC taxed as an S-Corp).

It may be worth considering hiring an accountant/bookkeeper to do this work for you. Considerations should include balancing the costs for doing taxes on your own, vs the benefits of hiring an accountant. There are also mental health benefits that come from not having to worry about your taxes. Keeping your own books and having someone do taxes might cost anywhere from $2-3k/year. Having someone do your books and taxes can be more than that.

Also all of these legal entities can have an impact on your personal credit rating. You need to structure how you show your income on paper in a way that banks can understand. It's sometimes annoying, but if you aren't a W2 employee of your company, then you don't have quickly verifiable "income" even if you are the owner of the business, can display its revenue, and have no partners.

  • Non-profit 501(c)3 , etc.
    • Can engage in politics but depends on percentage of your work.
      • You can not advocate for specific political candidates.
      • Alliance for Justice has a hotline for lawyers to answer questions like this.
      • A (c)4 doesn't provide tax deductible donations, but donations are not taxed.
  • Individual sole proprietor
    • You can work as an individual under your own name,
    • Get a unique business ID from IRS. You don't need to register with the State, unlike LLC
  • LLC
    • Primary benefit provide protection of your personal assets. But you need to not commingle your assets.
    • Need to register your business with the State
    • Gives you tax benefits, but same freedom as a sole proprietorship
    • Taxes are pass through
    • You can allocate different tax liabilities to different members of the partnership depending on their needs:
    • For Business deductions if you don't have a corp election each member writes them off on individual taxes
    • Ensures that you can be both owner and worker, you could "get fired" but still own business
  • S Corp
    • Any election that you make as a corp means that the entity will also be taxed.
    • You can choose to be taxed as an S Corp even if registered as an LLC
      • file a separate form to declare that you'll file as a S corp without making an election.
      • This allows you to avoid some of the hassles of having to deal with paperwork
    • With an S Corp members have to be employees, and treated as such.
      • Need to pay unemployment insurance
      • Income is split between earned and shareholder distribution.
      • Salary is based on "reasonable" metric to justify split. Also based on the tax bracket
    • Typically benefits from hiring an accountant
    • Even an individual can elect to be an S Corp, you can pay yourself as a W-2 employee, and then pay yourself dividends as a shareholder.
    • A SEP IRA is impacted because you can only contribute based on your income as an employee
  • C Corp
    • May only pertain if you earn more than 60k a year? Benefits as a C Corp... (we didn't go into great detail about C Corps)
  • General things
    • Taxes
      • As an individual, or LLC without corp election, you need to pay withholding taxes. It's recommended to do it quarterly, though fines from IRS are generally not steep if you just do at end of each year
      • As a practice you can allocate a percentage 30-40% into a savings account
  • Retirement accounts
    • Retirement savings (IRA, SEP IRA, HSAs, etc) for self-employed individuals are a great way to maximize your tax deductions
    • For self-employed individuals you can use a SEP IRA, which is based on percentage of your income
    • An HSA (Health Savings Account) is another way to maximize your tax deduction, and to also add to your retirement savings, by allocating a portion of your annual HSA contribution to a retirement fund.
  • Business Insurance
    • Regardless, any entity should get business insurance. It's not very expensive and provides protection to you. Hiscox is one company that provides insurance for self-employed
  • Application to Co-ops and other non-hierarchical/ horizontal structures
    • There is not a specific legal entity in US for co-ops. Typically they're registered under one of the existing entities listed above. We didn't get to go into detail about how to organize an LLC into a co-op structure, but one participant shared a list of resources:
  • Websites / Cooperative Networks
    • – Tech, Communications, and Media Worker Collective (WC) Network
    • - U.S. Federation of Worker Cooperatives (Membership Network)
    • – Project Equity (SF Bay Area)
    • – Georgia Cooperative Development Center (Free and Paid Resources!)
    • - National Cooperative Business Association CLUS International
    • - Legal Information & Best Practice Resources for Co-Ops
  • Handbooks / Documentation Guides
    • – Resources for Startup Coopsfrom Democracy At Work Institute
    • – Guide on Tech WC
    • - UK-based Cooperative, Hefty but heavily linked resources
    • Worker-Coop-Code-UK.pdf – Excellent Infographs
    • Learning to Think Outside the Boss – Sustainable Economies Law Center
  • Informational Videos & Podcasts
    • All Things Co-Op Podcast – Recommend Episode “Rodney North, Co-Op Consultant” (45min)
    • Embracing the Co-Op Studio – Video Game Studios & Co-Op Experiences (1hr+)
    • Economic Update: Seattle Firm Converts to Worker Co-Op (30min)
    • USDA Rural Development – Steps to Starting a Cooperative (1.5hrs)
    • Work Hard Pittsburgh Co Op Meeting (30min)
    • How Worker Cooperatives Work (7min)
    • Wobbly - Workplace Organising Platform
    • – A Community Wealth Cooperative (Loan Fund)
    • Shared Capital Cooperative – Worker Ownership Loan Fund