The Shane & Peter Inc. Blog » So You Want To Be A Contractor

Contracts: The Shane & Peter Inc. Contract

Peter — Mon, 19 May 2008 19:02:29 +0000

I’ve finally gotten around to generalizing our contract to share with our community. Please be advised that if you use this template, you are using it at your own risk and that we are not responsible for your use of our contract. Also please take it to your lawyer and have it reviewed before you use it (and feel free to let us know if you have any suggestions for improving ours)

Download the Shane & Peter Client Contract…

How we use this contract

Basically, once we’ve had enough of a conversation with the client that we know how much the project is worth (roughly), when it’s due, and what is required, we use this template to write a proposal. Often because our proposals are formalized, we illicit more confidence than competitors who have less formal proposals.

After the proposal is accepted, we save it as a contract. The line between proposal and contract are really blurry in this case and in fact, I’ve often wondered if i should just call it a contract or a proposal and stick with that.

What’s in this contract

Objectives

This is the place for an elevator pitch. This is where you put the summary that expresses the value of this project to the client. I also use this as the space the summarizes the project for me for later.

Approach

This section summarizes in laymen’s terms how the project will be executed.

Deliverables

This is a list of what the client is buying. This is NOT a list of what you are doing. If the client is buying a website, we might have deliverables for design, development, content, QA, and support. We would not write deliverables for things like set up SVN, or adjust color balance, or spell check content…. The client doesn’t need to see the trivia, only the mainline items.

Also, you should break out any items that could be optional so that the client can see a price tag on those items and decide to use or not use them.

Milestones & Schedule

Break down the project due dates. When is the client going to see what? This can be done in terms of generic weeks or by setting dates explicitly if there is a specific target date. If you set the dates explicitly, make sure to advise the client that you will only be able to hit those dates if you have a contract signed and a check in hand by XYZ date.

Payment Schedule

When will you be collecting money from the client? We usually do 50/50 or 34/33/33.

Client Requirements

Will you need things from the client before you start the project? If not, then remove this section. Otherwise list the stuff that your client needs to get to you BEFORE the schedule is initiated.

Assumptions

We rarely use this section. It basically allows us to explicitly state to the client what assumptions we are running off of in this contract. For example, we assume that the client has a host, or we assume the client will provide comps. etc.

Exclusions

Though we don’t usually use this section it can be very important. This is the place to explicitly state what is not included in the contract. This is especially important if the client is vague with their requirements and you have a feeling they are asking for something that you are not including in your proposal. It is also useful to articulate things that will be included in future proposals or by other teams that you are working with.

Terms & Conditions

This is where my lawyer takes over. This is where yours should too.

Acceptance

Sign it. Get it signed.

What about you?

Do you have any suggestions? Additions? Alternate approaches? Does your lawyer have any objectios? We’re allways working on our legal docs.

Contracts: Terms & Conditions

shane — Mon, 13 Aug 2007 07:44:20 +0000

A lot of freelancers have been asking us if we use a standard contract, what issues we address and the verbiage we worked out with our laywer. Since our contract was hard-earned, I thought it would be worth sharing. This is lawyer ratified, but if you choose to use it, neither Peter or I, nor our lawyer will be standing next to you in court when things blow up. Please, please, please sit down with your lawyer and make sure to get the odds and ends in place to fit your business.

All our contracts have a cover page, then the revised proposal followed by the terms and conditions and signature. I might be willing to create a template for the entire proposal / contract document if we get enough requests in the comments.

6. Terms & Conditions

6.1 Payment

All payments are due within 15 days of billing. Late payments will be charged a 1.5% compounded monthly late fee. Should a payment be late, Shane & Peter, Inc. reserves the right to freeze all work until accounts are settled. Payments will be made to:

Shane & Peter, Inc
123 West Cliff Dr.
Santa Cruz, CA 95060

6.2 Ownership

Shane & Peter, Inc. will provide a finished application(s) to the Client in the form of fla, swf, taf, tcf, php, psd, jpg, gif or html files. These files become the exclusive property of the Client upon acceptance of delivery, however these files are partially based on a non-exclusive code base created and maintained by Shane & Peter, Inc. and in some cases existing code was used to help create the deliverables. Such code and other underlying technologies do not become the property of the Client, only the finished files themselves. In addition, the deliverables may depend on code, objects (COMs), and other third party utilities that are the property of their respective owners. No rights to these dependencies is expressed or implied.

6.3 Point of Contact & Training

Shane & Peter, Inc. will require one point of contact during the contract for clarifying requirements for design, key features, usability and maintenance issues. Shane & Peter, Inc. requires this person be available to answer questions arising from the project within 24 hrs on workdays (subject to reasonable exceptions), and to have authority to make design and related decisions on the system.

6.4 Subcontractors

Shane & Peter, Inc. retains the rights to subcontract any portion of the contract.

6.5 Nonsolicitation

If within one year of termination of this agreement the Client hires or contracts with any employee or subcontractor of Shane & Peter, Inc, The Client will agree to pay Shane & Peter, Inc., a finders fee of 50% of the annual salary or contract fees offered to the contractor or employee. Said payment will be rendered within 30 days of hiring or contracting the contractor or employee.

6.6 Review, Expiration or Cancellation

This contract is valid for the calendar year of in which it was signed, upon which point it expires. Upon expiration, both parties may review and amend the contract and decide whether or not to renew. This contract may be terminated by either party with a full 30 day written notice. All payments will be due and all work will be submitted upon the termination of contract.

6.7 Limited Liability

The Client alone shall be responsible for: (a) the accuracy and adequacy of information and data furnished for processing; and (b) any use made by the Client of the output of the Software or any reliance thereon. The Client shall also be responsible for the continued operation and maintenance of the computer equipment and third-party software used with the Software, and shall comply with all operational, environmental and maintenance recommendations and requirements of the applicable licensors, vendors and manufacturers. The Client agrees that any liability of Shane & Peter, Inc. relating to this agreement and the services performed shall be limited to the amount of fees actually received by Shane & Peter, Inc., from the Client under this agreement regarding the services in question. In no event shall Shane & Peter, Inc. be liable for any special, incidental, indirect, cover, consequential, exemplary or punitive damages; any damages based on injury to person or property; or any lost sales, profits or data, even if the Client is told that any such damages may occur.

6.8 Warrantee

Shane & Peter, Inc will provide patches and bug fixes for any bugs or issues included in the scope of this contract within the grace period of no more than 30 days following the date of project completion as defined by the date the client signs off on the deliverables. All fixes outside of the project scope or after the grace period are the responsibility of the client. All projects involving the placement, editing and arrangement of content or design will have no warrantee past the completion of the project. Should further support be necessary, a support contract may be negotiated.

6.9 Credit

Shane & Peter, Inc. retains the right to use the Client within its roster of clients. A link to the Client website/application website will be placed on the Shane & Peter, Inc. web site as part of its business portfolio.

7. Acceptance

Any change to this contract shall be subject to mutual written agreement of the parties.

IN WITNESS WHEREOF, the parties have so agreed as of the date written below:

Should You Take the Gig?

shane — Thu, 26 Jul 2007 13:28:39 +0000

Do you know a good project when you see it? I find that choosing a project is much like dating. You are looking for a project you will enjoy spending time on, that won’t drain all your resources, and will leave you feeling better after the date than you did before it started. When I’m out mixing it up and have my sales hat on though, I tend to chase everything and have to fight the scarcity thinking that often plagues all contractors from time to time. So, as a result, Peter & I put together a new project score card we use to quickly measure whether or not we should pursue an opportunity.

New Project Score Card

Profit
Will this bring in a lot of profit proportional to the amount of work that needs to be done?
Timeline
Do we have plenty of time proportional to the amount of work that needs to be done?
Resources
Will this leave us with plenty of resources for other projects? Will this engage our resources well? Will our people be excited to work on this?
Marketing
Will this get us other clients / work?
Size
Is this a nice large juicy project? (Large projects tend to have less overhead and help with forward planning for the S&P)
Confidence
Can we handle this project with ease and confidence? (What makes you so sure?)
Education
Will we increase our skill-set or tool-chest through this project? Will this education be more valuable in the long term or the short term?
Vision
Do we think this project is a win for our client? Do we believe in their mission? Do we like them? Will we be able to help them achieve their goal?

For each item in the list rate the proposed project 1-5 where 5 is best. A perfect project will score 40. Consider this score when the project is complete to see how well it did. Consider this score while choosing and negotiating the project. A good negotiation will result in a high score.

This should give you a metric by which to measure your projects over time, a valuable tool for long term planning. A good habit too (which we will start doing now that I just thought of it) would be to measure a project once it is completed and compare it to your original grade. How accurate was it? If you have any major criteria area that we missed, please let us know in the comments! All help is highly appreciated.

Thank you to Eric for #7. That is a very valuable point.

Do you have an employee in contractors clothing?

shane — Thu, 19 Jul 2007 02:12:39 +0000

The government is amazingly succinct in their vaguery. And of course, make sure you guess right because nothing is more expensive than paying someone as a contractor that the government declares an employee (you get to pay all their back taxes + a fine). The key: if you can control exactly what will be done, when and how it will be done, then the IRS categorizes them as an employee.

Our accountant provided us with a list of 20 questions to help measure the proper placement of an individual. We also have an independent contractor agreement which requires the person to submit proof of contractor status. As our lawyer told me: definitely not a get-out-of-jail-free-card but certainly shows good will on our part. I am going to list both the questions and the proof of contractor status (and link to our ICA agreement) below for those of you who are working through the same issues.

20 Questions we use to help determine a person’s status

The answers do not all need to be yes or no. It is a question of whether or not you have a strong case. If you are in doubt, I suggest you make them an employee.

Instructions
An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.
Training
An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.
Integration
An employee services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.
Services rendered personally
An Employee renders services personally. This shows that the employer is interested in the methods as well as the results.
Hiring assistants
An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire supervise and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.
Continuing relationship
An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.
Set hours of work
An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours.
Full-time required
An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he chooses.
Work done on premises
An employee usually works on the premise of an employer, or works on a route or at a location designated by an employer.
Order or sequence set
An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.
Reports
An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.
Payments
An employee is paid by the hour, week, or month. An independent contractor is usually paid by the job or on a straight commission.
Expenses
An employee’s business and travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control.
Tools and material
An employee is normally furnished significant tools, materials, and other equipment by an employer
Investment
An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.
Profit or loss
An independent contractor can more a profit or suffer a loss.
Work for more than one person or firm
An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.
Offers services to vernal public
An independent contractor makes his or her services available to the general public.
Right to fire
An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.
Documentation
Independent Contractor must complete Form W-9 or W-8 as well as the following:

Using an Independent Contractor Agreement (ICA)

Click Here to Download & View Shane & Peter, Inc.’s Independent Contractor Agreement.

Please note that this is being offered out of the goodness of our hearts. Consult with your accountant and lawyer on the right document for your needs and organization. Don’t sue us if you have problems, we are just trying to figure this out ourselves and share what we are learning.

There are a few sections that describe and focus upon the proof and warranties of the contractor’s status. Section 8 below is a bit different though and I have rarely seen its like outside our own company.

8. Documentation
Independent Contractor must complete Form W-9 or W-8 as well as the following:

An independent contractor is an individual or organization that supplies services to Shane & Peter, Inc., but not exclusively for Shane & Peter, Inc.. In the U.S., an independent contractor’s services must be available or provided to the general public and physical proof must be provided to Shane & Peter, Inc..

Any one of the following is sufficient proof of independent contractor status:

a. A business office address separate from the residential address (not a PO Box #)

b. The filing of a business (Schedule C) Federal tax return that includes income from non- Shane & Peter sources. (copy required)

c. The contractor has employees and provides a copy of an employment tax return

In absence of any above proof, two or more of the following must be provided:

a. Business advertisement in the newspaper, etc.

b. Professional business card and stationery.

c. Business listing in the Yellow Pages or other business telephone directory

d. A separate business telephone or fax number or answering service.

e. A copy of an invoice to and a check or check stub from another company as compensation for the same type of service.

f. Proof of ownership of special business equipment, such as: a delivery truck; professional photography equipment; professional printing equipment; etc.

g. A special business license.

Former employees of Shane & Peter will need to provide substantial proof of independent contractor status, typically three or more of the above examples.

In addition, all independent contractors (except for foreign status individuals) are encouraged to provide a Federal Employer Identification Number (EIN) and not a social security number. An EIN can be applied for with Federal Form SS-4.

I require each and every individual to provide the information for us before they receive their first check. No proof, no money.

In the end much of this is subjective. As you can see in the quote from the IRS below, it is a question of control. And in reality control is a tough thing to measure accurately.

What the IRS has to say about this:

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

taken from: IRS Website | Contractors Vs. Employees

The Forms

shane — Sun, 06 May 2007 18:53:03 +0000

You are deciding to become (or currently are) an independent contractor. In part III we will cover forms you will need to be familiar with. Part IV will go through the basics of being in business. If you missed parts I & II, the covered the why of being in business and a business setup checklist.

First things first, I’m not a lawyer, CPA, nor a small business consultant. I’m just one guy on a team of business owners who has been out there for a little while and has walked the road ahead. So please check with a professional before making any serious decisions. This is just to help fill the gaps. Things change every day. This article was written in May of 2007, based upon our experience as business owners in Santa Cruz, California. Setting up a business may be different in your corner of the world.

Common Legal & Business Forms

Business & Legal Forms:

W-9
1099 & W-2
A General Contract
ICA
Copyright Assignment / IPR
NDA

W-9

All your clients should (and probably will) request that you submit a W-9. I recommend pre-filling one out with everything except the date, as it will have to get submit to each and every client. If you ever use subcontractors, make sure they fill out, sign and provide you with a W-9 as well. You can get a blank one from the IRS website.

1099 & W-2

The government likes your money and wants to make sure it gets its proper cut. So how does it really work? Every time someone gets paid, they are paid either as an employee (W-2) or as a contractor (1099). The amount of money is then recorded. Come tax time, the individual will need the proper form summarizing the total income received that year from a particular source.

I often find you need to keep track of what 1099s should be coming in from your clients and nag them. They are required to be sent out by Jan 31st, but just like your invoices, sometimes people need a little prodding.

Corporations do not need to receive 1099s. For everyone else, a 1099 is required for any sum over the annual total of $600 dollars. This means you need to make sure to fill one out for any service professionals such as your lawyer or CPA, as well as technical contractors and even your babysitter. For the past few years I have used a simple online service that handles sending your 1099’s for you at a very reasonable cost (filetaxes.com).

A General Contract

Billion-dollar corporations and government institutions have their own contracts that will pretty much define the playing field. They rarely leave us much room to negotiate terms due to our smaller size. On the other hand, most companies do not have a standard contract. I highly recommend you work with a lawyer to put together a contract which has your best interests in mind, or at least find a template that works for you and cutomize it. Contracts cover things like payment terms, early termination, use of branding, copyright, limiting liability and so forth. If it is not your contract, it’s probably not written with your safety in mind.

A few thoughts on the legal front: The more you get in writing, the better off you are. Keep records of everything. Carefully police your own words. In the end – integrity is the heart of your business – when it all comes to the line, your name is all you have.

A Standard Invoice

We all want to get paid. The most common reason for late payment is an incorrectly formatted invoice (missing key items, such as the purchase order # or a mailing address). Put together a standard invoice into which you fill in the blank. Using a proper invoice will help you get paid on time and will make the owner or accounts payable representative much more pleasant to deal with when you have to call and bug them (which I promise you will). If you don’t have one yet, read my post of creating a proper invoice.

An Independent Contractor Agreement

If you have people working for you (or if you work for us), you will want to get your hand on one of these. An ICA sets the groundwork for the client-contractor relationship. It defines the rights of the contractor and of the clients as they work together. This form is not used by everyone. Quite often, most of the key details that cover the working relationship with a client will be covered in the contract. ICAs are common for longer term relationships. You will run across it with most large companies.

A Copyright Assignment or Intellectual Property Rights Form

This form defines the proper owner of the body of work, ideas and goods that you produce when under contract. Basically, it means that whatever you do for this client belongs to them not you. You can’t go resell it. This may be a standalone form or is often part of an ICA.

A Non-Disclosure Agreement

You will often have to sign one of these when you work on a project that the client does not want shared with potential competitors (or anyone for that fact). These forms are very common throughout the industry. Read it, sign it and then mums-the-word.

Resources & Links

304 Free Legal Form Templates
Nolo Press – Legal forms
File Taxes.com – great for W2s & 1099s

The Setup

shane — Sun, 06 May 2007 17:57:49 +0000

You are deciding to become (or currently are) an independent contractor. In part II, we are going to provide a checklist to help you get started. In part III we will cover forms you will need to be familiar with. Part IV goes through the basics of being in business.

First things first, I’m not a lawyer, CPA, nor a small business consultant. I’m just one guy on a team of business owners who has been out there for a little while and has walked the road ahead. So please check with a professional before making any serious decisions. This is just to help fill the gaps. Things change every day. This article was written in May of 2007, based upon our experience as business owners in Santa Cruz, California. Setting up a business may be different in your corner of the world.

Setting up Your Business

Your Checklist:

Create a Business Plan: How will you make money?

Pick a Legal Form of Business

Fictitious Business Name (Optional)

Zoning & Supplemental Permits

Home Business Safety Check (Depends on your city)

Business License (if your city or country requires it)

Apply for an EIN

Open a Seperate Bank Account

Professional Certification

Employees, Sales Tax & Things We Don’t Know

Create a Business Plan: How will you make money?

When someone asks you, “what do you do?” or “what type of business is it?” can you answer in 30 seconds or less? It’s called an elevator speech. Write it down. It will help you focus and you will get asked that question all the time. It is nice to have an answer.

That’s the first part of a business plan. If you get audited, one of the first things the IRS will look for is a written plan on how you will generate profit. There are many templates online and some good free courses offered by SBDC & SCORE. Some people spend years perfecting their plan, while others take 30 minutes and hand write it on a napkin. It doesn’t matter how you do it, just do it, and put it in your files.

Pick a Legal Form of Business

What legal form of business is best for you? For some it is a sole proprietorship, for others it will be an S corporation or an LLC. Over the years, Peter & I have owned sole props, general partnerships, and S Corporations.

I picked a sole prop first because it was simple. I wasn’t too worried about liability (because I owned nothing and I wasn’t doing high risk services). The paperwork was relatively straight forward (I didn’t need a lawyer) and the cost was in my price range.

When Peter & I joined forces, we set up a general partnership. The GP was basically the same as the sole prop, but for multiple people. We laid down a few rules, a partnership agreement saying what happened if any of us wanted to leave, died etc… and we were off. I recommend using a lawyer for the partnership agreement and checking with a CPA.

Not long ago, we increased our exposure by taking larger projects with the higher potential for liability (if things went boom). We took on the responsibility for a team of contractors. We bought our own homes. Our legal & financial counsel agreed it was time to set up a corporation. It involved about a month of planning and paperwork, a few hours of a lawyer’s and CPA’s time and some local and state fees, which all together cost a few thousand dollars.

How do you decide? First of all .. go read my post on the business types you can choose from. It’s a bit thick but if you read slowly it will help. Then sit down with a CPA and a lawyer to discuss your particular situation.

One you have decided on your business legal structure, partnerships, corporations and LLCs will need to file the proper form with the secretary of state. Corporations will often have to file tax forms with the Franchise Tax Board. You might also want to check with the IRS on your federal tax schedule.

Fictitious Business Name (Optional)

You do not need a fictitious business name for a corporation or if you plan to operate under you own name. So a sole prop called Shane Pearlman Enterprises does not require me to submit a fictitious business name. If you do register a fictitious business name, they will give you the papers you need to open a bank account in the name of the business. You don’t own the name forever – in Santa Cruz County, where we live, it’s for 5 years, and it cost us $70. You will also be required to publish the business name in a newspaper within a set period of time, usually 30 days, which cost us $35 last time we did it.

Zoning & Supplemental Permits

Your country or city may also have specific restrictions and require a permits on some types of businesses. Check with your planning department to determine if a permit is required prior to the operation of your business. You should probably also quickly check with them regarding the zoning of the location you plan to have your office and make sure that there are no issues that will stand in your way. If you sell products, make sure you pick up a sellers permit. If you happen to code software like us, this was a non-issue.

Home Business Safety Check (Depends on your city)

The first time I got a business license in Santa Cruz, they required me to get a safety inspection from the fire department. I had the honor of paying $200 dollars for this, and I’m glad to know I’m safer for it. They didn’t mention it when we paid for our most recent business license 2 months ago, so I do not know if that is still in effect.

Business License (if your city or country requires it)

Depending on where you plan to run your business, go to the city or county office. If you don’t know which to go to, check out their website or give them a call. These days, many contractors run their business from home. Each city/county will have its own rules, costs and paperwork. Oddly enough, Santa Cruz County does not require a business license. If you happen to live in one of the incorporated cities in Santa Cruz County though (Santa Cruz, Scotts Valley, Capitola, Aptos…), make sure you go down to city hall and pay your $150 +/- bucks.

Apply for an EIN

An Employer Identification Number (EIN) is required for a corporation, partnership and anyone hiring employees. As far as metaphors go, this is like a social security number for your business. It will get used to identify your business for everything. Sole proprietors do not need one and often use their social security number for the purposes of federal and state identification.

Open a Seperate Bank Account & Credit Card

Like the business plan, one of the main key identifiers the IRS looks for in a business owner is the seperation of their personal and business finances. You should ALWAYS keep your business money in a seperate account. If you plan to use a credit card, then open a seperate one and use it just for business. This is incredibly helpful when it comes to bookkeeping and is pretty much required by the IRS.

Professional Certification

Many industries have organizations that police the quality of its service providers. In some cases, your industry may require a certification to even be in business. You can’t practice law, perform acupuncture or build a house in California (legally) without passing the proper state exam. This often has quite a lot to do with the significant level of liability inherent to the field. Other industries have certifications that increase the value of your business in the eyes of the customer, but are not required to be in business. Cisco Networking certifications are a great example. Some industries are not policed what so ever. When you hire a programmer, it is mostly based upon word of mouth referral, perhaps a client list, a CV, or just sheer personality.

Sales Tax, Non-Owner Employees & Things We Don’t Know

There are plenty of things that you may have to do that we have not. We don’t sell goods, we primarily use contractors and have no employees aside from Peter & myself. So if you learn something we missed or that I should update, please let me know – I’d love the input.

Resources & Links

California Small Business Services
Small Business Planner (SBA)
IRS Checklist for Starting a Business
SBDC Starting a Business

For the Local Crew: Santa Cruz

Go to Part III: Forms

Business Types

shane — Fri, 04 May 2007 01:21:53 +0000

The following is a brief summary of each of the various entity choices for a operating a business in California:

Make sure you check with a lawyer as you consider the proper solution for your particular case. This was put together on Jan 2007 for a California business (us) as we were deciding to change from a general partnership to an s corporation. Things always change. Make sure you get the most current information you can.

Things you should ask yourself:

How many principles are involved?
How concerned am I about personal liability?
How much money do I plan to gross & how much do I plan to make?
How much am I willing to spend on infrastructure?
What type of business am I in?
Will I have employees or contractors?

Take your thoughts on these and consult with a qualified CPA & Lawyer.

Sole Proprietorship

Description: A manner in which an individual engages in business personally rather than by means of one of the entities set forth below. This method avoids many of the formalities and reporting requirements associated with other forms of business organization. However, the proprietor is personally liable for the obligations of the business, which is usually the primary reason an individual might not use this option.

Our Take: Simplest, cheapest option for a single person. The issue of personal liability should be seriously considered based upon your type of business.

Corporation (Subchapter C)

Description: An entity which allows for limited liability in that none of the owners (i.e. shareholders) is liable for the corporation’s obligations merely by reason of being a shareholder. Formed under California law and governed by the Corporations Code. Income of the corporation is separately taxable at federal and state levels. Subchapter C refers to the section of the Internal Revenue Code governing taxation of corporations. Note that C corporations are subject to “double taxation” because the corporation pays taxes on its income and is not allowed to deduct as an expense dividends issued to shareholders, who then pay tax on such dividends. Double taxation is typically minimized by the payment of salaries (which must be reasonable) to shareholders, and the use of shareholder loans. Many corporations eliminate the double taxation problem by electing to be taxed under Subchapter S of the Internal Revenue Code (Subchapter S Corps). This Subchapter C tax structure is advised generally for businesses which reinvest most of their income.

Process: File articles of incorporation with the Secretary of Sate ($115.00), issue stock; shareholders elect directors, and officers are appointed by directors. Bylaws should be prepared and adopted, and it is advisable for shareholders to execute a buy-sell agreement outlining what may occur should one shareholder die, divorce or become disabled. Shares of stock in a corporation are the most easily transferable ownership interests of the interests under discussion, which is important if future sale of the business is contemplated.

Our Take: Ideal for larger companies that keep the money within the company rather than paying it to the owners. If I understand correctly, they also have a fixed tax rate of 36%, rather than a sliding scale (please double check this).

Corporation (Subchapter S)

Description: These corporations are the same entities as described above for purposes of California Corporations Law, but have elected to be taxed under Subchapter S of the Internal Revenue Code. A corporation making a valid S corporation election is taxed similarly to a partnership. The corporation’s net profits, losses and tax credits are passed through and taxed for federal tax purposes to the corporation’s shareholders and not the corporation, although California has a minimum tax of $800 per year for all corporations. California also has a separate tax for Subchapter S corporations which is 1.5% of corporate net income.

Process: Same as above, except that a Subchapter S election must be made by the shareholders and filed with the IRS within 75 days of date of incorporation if such tax treatment is desired for the opening tax year (otherwise can elect the following year for that tax year).

Liability: Corporate shareholders, directors and officers are ordinarily not liable for the debts or other obligations of a corporation. As a separate legal entity, the corporation itself is liable for such obligations.

Individuals may be held liable:

to the extent they have personally guaranteed corporate debts (often required by entities making loans to corporations)

to the extent they have received improper distributions (e.g., payments which might be characterized by the shareholders as dividends rather than employment income subject to employment taxes)

if a court “pierces the corporate veil” of a corporation to impose personal liability on shareholders (e.g where the shareholders failed to file corporate formalities such as maintaining filings, or keeping minutes of annual meetings).

if a director, officer or controlling shareholder breaches a duty to the other shareholders, or participates in tortious conduct

General Partnership

Description: An association of two or more persons to carry on as co-owners of a business. A partnership is an entity distinct from the partners. Each partner is an agent of the partnership and can bind the partnership in its ordinary course of business. Each partner is personally liable for the obligations of the partnership. For tax purposes, the income and losses flow through to the partners, who recognize gain or loss on their individual returns. A partnership files federal and state returns for informational purposes but does not pay tax. A K-1 is issued by the partnership to the partners indicating the gain or loss to flow through and this is reported on their individual returns. A general partner’s share of income is typically self-employment income subject to self-employment tax. (A Sub-S shareholder’s share of income is not taxed as self-employment income, though LLC member’s share of income is generally so taxed.)

Formation: One can maintain a general partnership on an oral basis, but it is advisable for the partners to enter into a written agreement outlining the terms and conditions of their business association as the California general partnership statute provides only as skeletal framework for the operation of a partnership.

Liability: Partners are jointly and severally liable for the wrongful acts or omissions of any partner acting in the ordinary course of partnership business or with authority of the partners, and jointly liable for all other debts and obligations of the partnership.

Our Take: Just like a Sole Prop but has 2 or more people. Make sure you have a clear set of written rules on how things work and what happens if it falls apart. Nothing can ruin a relationship like a failing business you weren’t prepared to handle.

Limited Liability Company (LLC)

Description: A form of business association which is not a corporation but whose members do not have personal liability for the debts of the LLC. An LLC is governed by specific provisions of the California Corporations Code. It is taxed similarly to a partnership, although in California it must pay a minimum tax of $800 per year as a corporation must, as well as a separate statutory fee for any year in which it’s gross revenues exceed a certain amount ($250,000.00). An LLC may elect to be taxed as a corporation for state and federal purposes.

Formation: File a Form LLC-1 (articles of organization) with the Secretary of State; fee is $85). All members will enter into an operating agreement which could be oral, but more practically, is generally written and addresses the terms and conditions of the business association. LLCs are relatively new form of entity and there is not a well developed body of case law regarding LLCs, thus it is not clear how LLCs will be treated under various circumstances. They are used most often for shorter-term ventures where liability protection is desired, or with respect to narrow ventures such as ownership of a particular piece of property by several members.

Liability: Members of the LLC are not personally liable for the debts, obligations or liabilities of the LLC. However members may be liable in situations similar to those set forth above with respect to corporations.

Our Take: There isn’t a lot of case law yet on LLCs and as a result things are not as clear. All I know, if you gross over 250k, you pay a heft fee, so if that at all possible, keep that in mind.

Figuring out The Why

shane — Thu, 03 May 2007 17:16:07 +0000

When considering the possibilities for your life and your career, I recommend stopping and asking yourself some questions.

The Short Version

For those of you who want the points without reading the story, here are my cliff notes. If you are looking for the how to, go to part II. But, before you do, if you are not in business yet, and even if you are, take the time to read this.

80% of businesses go under in the first 5 years. When I asked Tom, one of my mentors why, he responded that it was because they got distracted by life and did not focus consistently on the things that would have made a difference. Maybe those things are uncomfortable, perhaps they didn’t have a mentor to guide them. In his opinion, they didn’t have a big enough reason why they had to succeed. Having personally closed the doors on a business, I could relate.

Being in business is phenominal, no bones about it. I’m in it for the freedom, the choices, the influence and the money. To pull it off you are probably going to have to do things you don’t necessarily like and you are definitely going to have to change. You need to have a reason why bigger than just having fun or loving the business, simply because when things get tough, you need something that drives you through the struggles. So before you start, ask yourself, Why?

In Part II, we will go through the abc of how to get it running properly.

Wish you could read this in Polish? Luck you, this article has been translated and is now available thanks to Witold Rugowski.

A Question: Why?

I asked my dad one of those questions when I was 25.

“My sister and I are adults. Now that you see who we have become, what would you have done differently when raising us?”

It was a tough question. There was a few minutes of silence and then he responded in his careful manner,

“I would have taught you to dream beyond college. You see, we pushed college so hard thinking that you would figure it out on your own and never helped you prepare for what came after.”

It wasn’t the answer I was expecting but I knew what he meant. I went through five majors in college. It wasn’t that I had a hard time, I was pretty much a 4.0 student, I just had no clue what I wanted out of my life. My sister had panic attacks her final year as she approached graduation. We had the skills, the motivation and the energy. We just had no vision, no dream, no Why.

So I ask you: why?

No, not just why do you want to be a business owner.

My second mentor in business led me to a conference where I heard Mark Victor Hansen (the chicken soup for the soul guy), who during his talk said the following:

“Most people go to school, to get some form of job, that provides a certain amount of money and time, from which they carve out what ever life they can. The problem is, that is entirely backwards. Truly successful people figure out the life they want to live. They figure out what they want to have, what they want to do and who they want to be. Then they go look for someone who has that lifestyle, ask what them what they did and if it is legal, moral and ethical, they grab on their coattails and do it.”

I remember asking Tom,

“What if it’s selling toothbrushes or shoveling shit?”

He laughed and responded,

“If shoveling shit got you everything you wanted out of your life, wouldn’t you be happy?”

He had a point. He proceeded to explain that there are always things we love and things we hate about what we do. Do you think the Olympic athlete loves every work out? Does the nurse love cleaning bedpans? The question is really, what do you want from your life and are you moving towards it.

If you don’t already know – I highly suggest you make a list, like we did. I found it really hard. For my wife Julie, it was like firing a machine gun. She rattled off 140 things she wanted to have do and become on the spot. My wife is an amazing visionary. I managed to get to 20 before I started writing, more surfing, more travel. I showed it to Tom and he laughed, “details” he said, “dreams need details.” So I started over. My list is well over a 100 today and the crazy thing is, I constantly cross things I achieve off there, & I know I am living a life of purpose. I am going to include my list of a 100 at the end of this post.

The Dream

I usually get up when I want to in the morning. I surf. I meet new people all the time. My wife & I like to swim mid day. I love working in coffee shops. I face some fascinating and incredible challenges, and I make an impact within the team I work with and the customers I serve. As a team, we serve fortune 500 companies, receive international accolades, and make a pretty significant income, more than we ever could have as employees. And we work from home. It is about freedom, choices, making a difference and income. Plain and simple.

Is it worth it? Is it right for you? I don’t know. For that freedom, choice and income, we trade in stability. That doesn’t mean stability won’t be there some day, it comes, but there are no guarantees. Of course, companies don’t seem to offer the same guarantees to their employees that they offered my parents. It takes serious discipline, the ability to focus, a willingness to learn, change, maybe do some thing you don’t want to do, and a really strong work ethic. Can it be done? There is no doubt about it. We are proof. Many others are proof.

So what made me decide?

I was a part-time teacher & programmer who went through a number of jobs. Between you and me, I wasn’t a stellar employee, I never really liked being told what to do. I loved surfing, my girlfriend (now wife), meeting people and making things happen. For me, it is about the ability to choose, and even though I am pretty conservative, I am open to taking risks. So when I met Quinn McLaughlin, it was the right place and right time.

Quinn was sitting at Lulu’s (same place I first met Peter) typing on what had to be the smallest laptop I’d ever seen. I checked it out, and we geeked out looking at some of his cool toys. He had just closed the doors to Osiris, his video game company, and was living it large. He surfed (now kites) or biked every day. He worked out of coffee shops, some times on the beach in the shade, or in a park – anywhere you could take a laptop. He chose when he worked and when he didn’t. He made enough money to cover a good life style in Santa Cruz (no simple feat) and still had enough to wander throughout China and Mongolia for a few months on top of it. Basically he lived the life I wanted. So, I bugged him to hook me up so that I could do whatever it was he did. And he did. And I thank him to this day. He gave me my first client and lent me his credibility when I was ready to branch out and get my own clients. Quinn showed me a vision, a life where I could make the choice on how to live my life.

Then I met Tom, and he taught me that a contractor is truly a business owner, not some cut rate employee who doesn’t get benefits. He and his wife had built businesses, some great and some small, and in the process learned how to create systems that enabled the business to continue on whether or not they were personally involved. Basically, they got free. They showed me that a business can lead to personal financial freedom, control of my time, and helping others in significant ways. They showed me another vision and this vision drives Julie & I every day. We want people to come play with us.

The What

The first day I met Tom, we discussed how to analyze a business opportunity. Three things stuck in my mind and are a key part of my decision making today:

“Your income will be in direct proportion to the problems you solve. The greater the problem, the greater the income. That is why heart surgeons make more than stock clerks. After all, which is more valuable to you? When you are looking at any business, always ask yourself, what problem will that solve?”

“Timing is everything. A great businessman sees trends and act on them. The best way to make money in today’s world is to place yourself in front of a trend. Ask yourself, will more people participate in your industry next year than they did this year? Is the need for what the business offers increasing?”

“Find someone who has made it in the industry who has a vested interest in your success. There is no greater thing in the world.”

I could write books on each of these, maybe some day I will. If you are lucky enough to already have something that you love to do, go do it. If you are looking, the thoughts I have to offer is the following: look for something that you stay up late about because you are too enraptured to go to bed. Then figure out how to make it a business.

What do we do? We solve problems. That’s what Peter & I love to do. Oh, we happen to play with computers too, but that isn’t the heart of what we do. Computer are just the how, not that what, nor the why.

Go to Part II: Setting Up Your Business

Because a few people asked me to add it…

The Top 100 Things I Want to Have, Do & Become

I wrote this list the same year I started my business. We’ve accomplished a number of these and have quite a way to go on others. Every time I see this I still get emotional. I’m sharing it because seeing Julie’s list inspired me to stretch to make my own. Sometimes you need to see someone else do it for inspiration.

Julie has the option to be a stay at home mom

Julie gets her PhD

Buy a house

5br / 4ba home on the ocean overlooking good surf, with palm trees, mediterranean style, outdoor shower & hot tub.

Honeymoon on a warm tropical location

Buying Julie’s wedding present cash

Get completely barreled in an aqua-marine hollow reef wave

Time to read fun books

Own 12 properties

Camping in Baja on a good south with close friends

High Proformance 9′0 longboard

Have 6 months expenses in savings

Remodel our kitched with limestone counters with fossils in them, old spanish tile floors, cheery cabinets, high end pro-gass range & stainless steel appliances

Heli-boarding through deep powder

Romantic diners with Julie at 5 Star Restaurants

Surf a tidal bore

Sunshine streaming into the windows of a new house I build or designed myself

Scuba dive with hammer head sharks

Give ‘Edward Bloom Days’ to people around me

Die in peace with a smile

Visit my parents often

Spend time with Orianne

Climb a 5.11

Climb Mt. Kilamangaro

A cute puppy

California King Bed

A home in a spanish speaking country

Live in Nanny

Play flamenco guitare

Safari in Africa

Eat wierd animals at the carnivore club

Fall asleep every night knowing Julie is proud of me

Be a leader of men

Help provide a moderate presidential candidate – financially conservative and socially liberal by today’s standard

Heal my back pain

Grow an herb garden

Eat grain fed beef

Learn salsa dancing and go out with Julie

Pay cash for daily living

Light weight laptop

Go deep see fishing and catch a marlin

Surf whenever and where ever I want

Ride horses through mongolia

Tour New Zealand on bicycle

Teach my kids to dream, set goals and push through failures

Donate time and money to set up a teens entreprenurial project

Donate time and money to set up a parent & child finance management class

Support Julie’d charge for justice

Have a strong friendship with my kids

Create and teach a semester course on leadership to graduate students – after all they teach our kids

Own a huge personal library

Make Julie feel loved & love to my Julie often

Surf Sunset beach

Speak in front of a 100,000 people

Get massages whenever I want

Have friends all over the world

Our kids feel like winners and know their parents are too

Julie loves, respects and edifies me to others

A car with air conditioned seats (I hate sweaty back)

See my Abs on last time

Make my children laugh & be the shoulder they can cry on

Make people smile every day

Inspire others to push beyond their own fears

Take cooking courses with 5 star chefs in six countries: Italy, Morocco, Thailand, Japan, France, Lousiana

Never run out of clean sox or underwear

Buy Julie sexy Lingerie

Take Julie somewhere with a beach, private cabana, reef, where its warm and she can wear those sexy clothes

Sail around the pacific & ride amazing unridden rights

Go to a couples retreat every years

Have big weekend BBQs with friend on patio

Good friend to share workouts with

Never worry about the cost of medical

Develop a strong relationship with mom and dad

See antartica

Be 20 feet away (safely) from an Orca in the wild

See mardi-gras in new orleans

Hike the trails in Machu Pichu

Own a vehicle with a navigation system

be positive and uplift people

Help friends (& even strangers) in need

See arches, zion and grand canyon

Expand my circle of close friends

Sit around and spend time with multimillionaires

Go through pre-race / defensive driving school

Surprise Julie with gifts

Stay at the closest hotel to each business event

Have lunch with Mark Victor Hansen

Have dinner with John Gray

Take a long walk with Joe Caruso

Wake up to Julie’s genuinely happy laughter in the morning

Overcome my fear of loosing my relationship

Make my own furniture with dad

Provide seed money for inovative business ideas

Have time to cultivate intimacy

Fly my kite with Julie & kids on a field of flowers basking in the sun

Fly to good waves when its flat at home

Live a life of purpose surounded by love

Have on demand hot water and get pruned every day

Take singing lessons

Court my wife until the day I die

Surf santa cruz island

Go abalone diving and eat one

Get 2 meal tickets at the culinary olympics

Own a billboard on a major freeway where I can write whatever I want. Make people pause and think.

Receive an x-mas card from the whitehouse

… to be continued

Go to Part II: Setting Up Your Business

What Goes in a Proper Invoice?

shane — Wed, 02 May 2007 19:51:23 +0000

When I first started contracting, I was amazed at the amount of paperwork stuff I had to figure out. Frankly, I just wanted to get paid. So in that vein, for those of you have sent the following type of message:

Dear Client,
Where is my money – its been over a month?
- xoxo Contractor

and recieved the following in response

Dear Contractor,
Upon reviewing your invoice, we noticed you are missing everything except for the amount. Please send us a revised invoice and we will place you back in the payment queue for next month.
-xoxox Your every loving AP department representative

I highly recommend getting a proper invoice figure out.

First question, how are you getting paid? Is this a fixed rate contract? Time & Materials? Sale of Good? Well, we can’t help you much on the last one as we don’t deal in it (sales tax and all that), but with the first two, let go through it.

So what actually goes in an invoice? For those of you who are not using QuickBooks to track your business, we will lay it out here for you.

Use with all invoices:

Your Business Name – the check will be made to this name

Your Business/Mailing Address

The Client’s Name

The Client’s Business/Mailing Address

Invoice Number

PO Number

Project Name

Terms

Due Date

Total Amount Due

Fixed Price

If your bid was fixed – you do not need to expose what happened behind the scenes. One line item with the product or service description and price suffices.

Short and simple.

Time & Materials

If you are charging by time and materials, then you have two options:

1) Submit an invoice and a timesheet separately

Include a line item for time spent and the cost
Include a line item for material and the cost

A line item should include the following:

Example:

Time Description Rate Total

25.5 Design & Chop of the xxxxxx Website 25 637.50

Helvetica Nueue Font (approved by client) 1 29.99

2) Integrate your time sheet into your invoice

Include a line item for each activity & block of time.

Example:

date Time Description Rate Total

3/23/07 2.5 Rough out some concepts 25 62.5

3/24/07 0.5 Review 1st comps 25 12.5

3/24/07 3 Round 2 comps – focus on web 2.0 style 25 75

you get the idea…

4/1/07 Helvetica Nueue Font (approved by client) 1 29.99

Which is better? That totally depends on what your client likes and what software you use to track you time. What you don’t track your time? Personally I use QuickBooks, which has an awesome time tracker that integrates directly with billing. Peter is on a Mac & uses iBiz because QB seems to hate Mac users (don’t we all). We are still looking for an integrated solution and will certainly blog on it when we find that.

Some Specifics

Terms: You can put whatever terms you like, but frankly, you’ll probably get ignored or snorted at if you request less than net 30. I’m not saying that it is bad to try, just that very few companies every pay that quickly. For example, we pay all our contractors at the first of the month. Why? Because we are busy, and I set aside a day each month to handle all our accounts payable. So, if you happen to be working with us, a smart thing to do is figure out what day that is and get your invoicing lined up. This is pretty much true with everyone. I have learned to make friends with someone in the AP department in most of our large clients, as nagging them seems to be the only way to ever truly get paid. We have had Fortune 500 companies be months late, not because they can’t pay, just because the bureaucracy is that bad. The squeeky wheel gets paid.

PO: if you are working with a company that uses PO’s, don’t miss this. Best way to have your payments get delayed indefinitely.

Some Samples

We asked one of our contractors if he would be willing to make a generic version of his invoice since it is far and above the clearest an nicest we receive from our collective group.

Download Invoice Template

Have fun, make some money & make a difference.

Time	Description	Rate	Total
25.5	Design & Chop of the xxxxxx Website	25	637.50
	Helvetica Nueue Font (approved by client)	1	29.99

date	Time	Description	Rate	Total
3/23/07	2.5	Rough out some concepts	25	62.5
3/24/07	0.5	Review 1st comps	25	12.5
3/24/07	3	Round 2 comps – focus on web 2.0 style	25	75
you get the idea…
4/1/07		Helvetica Nueue Font (approved by client)	1	29.99