Starting New Company 3

[jdgengineer]

In the near future it looks like two other coworkers and I will be splitting off to start our own company. The three of us had previously been in discussions to take over our current company. The current owner of the company is looking to retire in the near future. We have been in discussions to transition the company but recently the owner has decided that he would prefer to dwindle down the business over the next several years rather than transition the company. It's complicated and right or wrong decision this is what the current landscape is looking like.

While we are setting up our own company he has expressed flexibility and intends to make it a peaceful transition. We would potentially be working as contract engineers for some current work that is in progress and would be acquiring "our" clients from the transition.

Having not gone through this before I was hoping to gain some advice and perspective from those of you who have started off on your own. We will be engaging a lawyer (we had one that was helping with the transition) and an accountant but was hoping to get some input from those of you who have gone through it before. We will be obtaining E&O, liability, etc and most likely forming an S-corp (although still educating ourselves)

 

[CELinOttawa]

Put everything in your spouce's name as soon as possible, ideally well before incorporation.

WRITE A PARTNERSHIP AGREEMENT. I don't mind sending you our's for you to adapt, so long as this is understood to be entirely without responsibility.

Plan. Plan again. Hold corporate meetings before you incorporate and get used to making them productive.

Shop for your E&O after you develop entire set of procedures and, in particular, your Risk Management Plan draft/template/outline and approach as well as official policy.

 

[zdas04]

A corporation requires transactions to get money in or out (for you to get paid you have to call it "salary" or "dividend" etc). A sole proprietorship or partnership the expenses are deducted from the gross revenue and the difference is income to the owners. I'm a sole proprietorship and am very glad I didn't accept the conventional wisdom that an LLC somehow protected my personal assets.

Your major risk is being sued over something that you stamped. The LLC (or sub-chapter S or any of the other "limited liability" small business corporations, I'll call them all LLC because it is easier to type) in no way protects your home and family from becoming part of that suit (remember that a corporation is just a stack of paper and a corporation cannot stamp a drawing, a person does that). So the LLC protects you against someone tripping on your steps, but not your blowing a calc on a drawing.

Really the only benefit of the LLC to you in the scenario you described is it forces rigor into the process of taking money out of the company. You can apply the same rules in a partnership, but it is harder to enforce (a partner taking money out of a partnership is not embezzlement, it is taking his own money).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[Triangled]

running a business is an entirely different set of skills than performing engineering.
maintaining the relationships in a partnership is yet another set of skills.

 

[beej67]

IMHO:

The greatest thing about owning your own business, is you get to fire everyone doing overhead tasks and pocket the multiplier. Here are some tips on that:

Spend a lot up front on your accountant, have them set up Quickbooks for you, and then do your own accounting. Bring him back in for taxes once a year.

Learn a CMS and write your own website. For what you need, you can do it just as well as some contract guy, and knowing how it's built will mean you can easily add content yourself.

Go lean on the office, or dump the office entirely. It's all just computers anyway.

Let your work be your marketing.

Save as much money as you can before the next crash. If my watch is set correctly, that should be around 2019.

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -

http://www.campbellcivil.com

 

[SteelPE]

"save as much money as you can before the next crash." Nice. Your method of using an accountant to set up Quickbooks is exactly what I did. Now I see them twice a year. Once to look over the file to make sure there are no errors and the second time is to have my taxes done.

I fell into the consulting thing after the company I worked for, a fabricator, went out of business. I thought about setting up an LLC or some other entity but never did as that might have required me to set up the business and file taxes in each state that I do business. I also spoke to a few engineers who said that a skillful lawyer can cut right through the corporation BS and still get you personally. Plus I was lazy

With multiple players my experience will probably not help you. Good luck.

 

[CELinOttawa]

I've not heard of a Corporation failing to protect an Engineer in Canada. Perhaps that's just a lack of looking and listening, or perhaps there is still that significant a difference between Canada and the US. I've been advised by three lawyers (our corporate, a friend and a construction litigation specialist) that up here as long as you don't do anything unethical, knowingly illegal, or grossly negligent the corporation will protect you. The test is essentially the same as for piercing the corporate veil for other issues.

Our Supreme Court has also set aside the doctrine of "fundamental breach", so things are looking up in the Canadian market for ethical, honest and hard working engineers.

 

[glass99]

I set up an S corp and its a Professional Corporation. If you are offering engineering services there are restrictions on the name of your business, which in NY is governed by the Dept of Education.

Whilst it is true that a corporation will not protect you from being sued personally in the US for engineering E+O, it would save you from regular business risks. For example, if its a recession and you have bank debt payments due but no projects, it is the corporation that declares bankruptcy, not you personally.

 

[Compositepro]

The problem is that banks will not give small businesses loans without a "personal guarantee" from the business owners or officer of the Corporation.

 

[IRstuff]

In California, state law prevents the formation of LLCs to prevent personal liability for certain professionals, like doctors.

TTFN
faq731-376

Need help writing a question or understanding a reply? forum1529

Of course I can. I can do anything. I can do absolutely anything. I'm an expert!

 

[glass99]

The liability protections of a corporation are pretty useless. Tax is potentially a bigger consideration depending on which state you are in: in NYC an S corp will get you out of paying state tax and federal tax on your "distributions", but not city tax. We have to pay 8.875% city tax on corporate distributions as opposed to 3% personal tax if it were salary. However, you do not pay Medicare/SS on distributions which saves ~14%, but only up to the limit of $110k/yr. I think they way it worked out for me is that its better to be unincorporated if I earn more than $300k/yr or thereabouts.

The other possibility is registering your corporation in a state with no tax like Texas. It raises a whole host of other complexities, though in my case would save a $10's of thousands in taxes, so I have considered it.

My accountant was useless in explaining all this to me, and had to figure it out myself.

 

[hondashadow1100vt]

I am no expert on this subject, but I read a very interesting book on the subject a while back called, "Inc. and Grow Rich". The book was an excellent and interesting read. I thought that the book was good for the information included on corporate discipline (i.e., strict separation of personal and company accounting) and for an alternative perspective on asset protection strategies. The book was opinionated and championed certain approaches such as C-corporations over others for tax purposes. It also championed the idea of Nevada corporations which sounded like a really interesting way to get your corporate assets into a protective structure where lawsuits cannot access the earnings.

I am curious...Does anyone out there know of professional engineering businesses operating under either a C-corporation or a corporation that is owned by a Nevada Corporation?