Should I Incorporate? The Knowledge Worker’s Dilemma
Happy Monday, everybody. To help prolong your procrastination over morning coffee just a little bit longer, I’ll offer you the latest installment of reader question Monday. Today, I answer a question that many reading my blog probably have: should I incorporate?
Here’s the actual question, as I recorded it.
What is the cost/benefit of incorporating? Should I just keep paying for domain/hosting through my [credit card], or would it be worth the hassle to move to a real business?
As you can see, I’ve generalized a bit in order to make it more broadly applicable. But I’ll speak to all salient points through the post.
Should I Incorporate?
Yes. Alright, post over.
Just kidding. At least, I’m kidding about the “post over” part. I do think that you should incorporate.
“But you don’t know anything about my situation, my job, or my life!” you protest. And, while that’s true, I’d argue that I don’t need to know anything about it, assuming you’re a knowledge worker. To make my case, let me now speak explicitly to costs and benefits, as requested.
Cost of Incorporating
This is going to be a little US-centric, but I’m hoping the general reasoning applies to all of you out there not based in the US. The specific costs may vary, but the philosophy shouldn’t.
All of this assumes that you setup an LLC, which I’d highly recommend. You could set up an S-Corp or a C-Corp, I suppose, but those entities have more rigid regulations about shares and operating agreements and such. LLCs were designed with your situation in mind. So let’s look at your costs for setting up an LLC.
- Filing fee: somewhere between $0 and $500. (I’ve done it in Michigan, where it was $50 and Illinois, a junk bond state where everything is horrendously expensive, and it cost $500.)
- Annual maintenance fee for each subsequent year: somewhere between $0 and $250.
- The half hour it takes to do the paperwork. (If that — you can literally watch me file for an LLC in a 10 minute video.)
- The countless hours you agonize over a name before picking one and kicking yourself for agonizing over it for so long.
That’s it. Now, there are all sorts of other things you could spend money on: paying a lawyer to do the paperwork, business cards, building yourself a snazzy website, etc. But you don’t have to spend money on those things.
You’re talking about a fairly bare bones investment in the grand scheme of things. Even in a state-level kleptocracy like Illinois, you can run a business for only $2,750 for 10 years, or, something like 0.2% of your salary. So cost is pretty low.
Basic Benefits of Incorporation
Let’s get as quickly as possible to a payback point, where you realize return on investment (ROI). In other words, you’re out up to $275 per year for 10 years, so how do you earn back $275 per year? Well, here are two ways you can win that back, almost without any effort at all.
- Salary negotiation
- Tax deductions
First up, let’s talk tax deductions. As an individual, you can itemize your tax deductions and claim certain “work-related” expenses. This is pretty limited, though. As a business entity, you can claim a whole lot more: office supplies, part of your rent/mortgage for a home office, new computers, etc. Many people worry that you need to turn a profit to do this, but you really don’t, as has been explained to me by accountants in the past (you should consult pros to confirm my advice, BTW). Apparently, operating without profit or even revenue for several years is normal enough.
Secondly, salary negotiation. If you’re scratching your head, let me connect the dots. Once you incorporate you are a full fledged member of the society of business owners. I’d go ahead and put that on your resume. This gives you a certain cachet when applying for jobs. How much of one, exactly, I can’t say. But it seems exceedingly likely that you’ll be able to negotiate an extra $300 per year if you play your cards right. And you need only do that once to reap the benefit every year for the rest of your career.
Going Beyond the Basics: Fretting Your Employee Status
So, let’s recap for a moment. The cost of incorporating is relatively minimal, and so is the amount of time you spend doing it. And the effort will probably pay for itself with minimal marginal effort on your part. You should do it just to help yourself to a life experience and an extra few bullets on your resume, if nothing else.
But what about your employer? They forced you to sign a draconian non-compete claiming that anything you ever do, including your children, belongs to them forever. Surely they will subject you to a mighty wrath for having the temerity to start a business entity, no? Well, actually, yes. Er, no. I mean, they probably won’t care.
Again, you should consult a lawyer on the specifics. I don’t offer legal advice, but pragmatic, realpolitik considerations that broadly apply. Those draconian non-competes are more about terrifying you than laying the ground work for GiganTech to come after your business with its net worth of $47. They do this the way a loan shark casually carries around a piece of rebar or a silenced pistol. They’d rather the unpleasantness be hypothetical, with the idea of you stepping out of line never, for a second, entering your head.
If you just form a business entity, your employer will probably never know. And if they found out, they probably wouldn’t care. And, even if they cared, I don’t believe the simple fact of organizing an entity constitutes “competition” since you haven’t transacted any business. Again, consult a lawyer, but I wouldn’t let this stop you.
And, frankly, if you’re this terrified of your employer, you should probably find a new employer.
The Importance of Side Hustle
Ideally, you don’t just have the entity and let it gather dust, after recouping tax benefits and making your resume better. Go start a side hustle of some kind, however small. Make Pluralsight videos, like I did. Start a blog and monetize it a little. Make an app or something.
Earlier this year, I wrote some post or another that made it onto Reddit or Hacker News or something. I usually steer clear of comments sections everywhere but this blog, but I happened to glance through. Most actually seemed to like the post, though one particular commenter seemed a little worked up at his inference that I was suggesting every developer become a consultant, which was, apparently, stupid.
Although I didn’t explicitly say it then, I’ll say it now. Every developer should become a consultant. Consultants (despite what app dev agencies claim) get paid for their expertise, and categorically not their labor. If someone is paying you for your labor, any consultative opinions you offer are sound and fury. You’re just a laborer with unsolicited opinions. And being a laboring grunt is a bad — nay, absurd — look for a knowledge worker.
Why am I off on this mild tangent? Because starting a business and starting a little side hustle lays the groundwork for establishing you as some kind of expert. You become an expert that offers a product, productized-service, or service other than general labor. And anybody with spare cycles and expertise may opt to consult (and will certainly be asked to do so). Starting a business encourages you to side hustle, side hustling encourages expertise, and expertise encourages serious paydays.
Yes, You Should Incorporate
I’m not really one for mushy, self-help type stuff. But there’s really a psychological effect that starting your own business has. It’s like the business world’s version of rebuilding your own kitchen or bathroom with your bare hands. You wind up with a confidence and underlying competence that demystifies all aspects of the business world. Even if you later outsource stuff, you still grasp it and feel in command.
I suppose I’m advocating, in some sense, for a fake it ’til you make it kind of approach. Starting a business makes you a business owner. Being a business owner gives you confidence in all of your career dealings, which leads to better results. Call it mushy or rah-rah, if you want, but it really seems to work.
And there’s pretty much no downside. Effort and cost are minimal, and, at worst, you cross something off your bucket list. So, to answer the question, “should I incorporate,” I say, “absolutely — do it yesterday.”
Fire Away with More Questions!
If you have a question, please feel free to ask! I answer them in every Monday’s post.
And, by the way…
If you like the wisdom here, such as it is, you can get a whole lot of that more in my recently released book, Developer Hegemony. If you want a sample of that, you can sign up to download some chapters below.
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