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The Almighty Buck

Leaving the Contracting Company for Independent Work? 49

Posted by Cliff from the making-it-out-on-your-own dept.
Giggles of Doom asks: "I currently work for a technology contracting company (one of the ones that finds you a tech job and you work at some other company as a non-employee) and have been for the past couple years. Recently, however, I have begun to realize that for the past two years they haven't really done much for me, yet they still get a commission for every hour I work. The benefits I get from them aren't that great: non-matched 401K (that they are canceling), discounted prices on stock that has gone down for the past several years, and a few paid vacation days. I have begun looking into going independent. After all, that commission my contracting company is getting could be money I could be getting. And considering that they don't seem to be offering much in the way of benefits for that commission I don't feel obliged to have them keep on getting it. I am wondering if anyone else out there has gone through this kind of thing, leaving a contracting frim to work for themselves, and if they have any advice to give on how to get out of contracts, billing the company you're doing the work for, etc. And, biggest of all, was it worth it? Obviously it will be different with everyone and every company, but I would be interested in hearing of other peoples' experiences."
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Leaving the Contracting Company for Independent Work? More

Leaving the Contracting Company for Independent Work?

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  • Health Care is the Key. (Score:3, Informative)

    by reaper20 ( 23396 ) on Tuesday November 19, 2002 @05:23AM (#4704566) Homepage
    Weigh the costs of Health Care of yourself vs. your company.

    This ultimately forced me to find a day job, just couldn't (and didn't) want to pay with a purchasing power of one person vs. the (relatively) cheap programs a real company offers.

    Plus, if you're by yourself you'll talk yourself into the old "Well, I've been as healthy as a horse for three years" line and you'll wanna skimp, until one day you throw your back out lifting a rackmount UPS or you fall off a ladder in some godforsaken server room in the middle of the night.

    Just think to yourself "Can I afford a $3000 bill if I get hosed?"
    • Yeah, that's why there needs to be healthcare reform or something. Our healthcare shouldn't be a shackle to our job. Sadly, my comment does not help your predicament.
    • Health Insurance seems like a major hurdle, but look at it this way: how many hours do you need to work to pay the premiume?
      I am an independant contractor (but I go through agencies because they have better contacts than I do). I pay about $800-$900 dollars a month for Blue Cross. Seems like a lot? yeah, but I make that much money in one long day, so it is a no-brainer.
      (BTW, get disability insurance too.)

    • Just think to yourself "Can I afford a $3000 bill if I get hosed?"

      If you're saving $500/month in premiums, you sure can!

  • [Slightly OT] They get what they pay for... (Score:3, Informative)

    by ivi ( 126837 ) on Tuesday November 19, 2002 @05:40AM (#4704610)
    Let's look at this from the Client's point of view

    You work for your contracting company
    Its Client 'rents' you by the hour...

    Suppose you muck up (however unlikely this may be)

    Case 1: You're still working for the contractor

    Client can sue a [presumably] large company
    & - if it wins - have a greater chance of
    their suit bringing them in big compensation
    for their efforts in the courts...

    Case 2: You become a one-person-contractor

    Client can sue you (or your own company),
    but (I'd suggest) your public liability
    insurance value will be much less in $'s
    (ie less to go after)

    Now, if you are competent... and your Clients
    know that, you should be able to break away
    from your current employer... provided that
    you haven't signed with the employer -and-
    the Client hasn't signed with the employer
    some agreement that precludes that for some time
    after you leave the employer.

    ('don't know if that'd be legal... but you'd
    sure be tied up, just as your funds would be,
    if they sued you for anything like that...

    And, even if they could afford it, your Clients
    probably don't want the hassle of a legal battle
    either; not only that, they may be depending on
    the presense of -other- guys in your (present)
    role, coming from the same contractor as you do;
    why should they rub their vendor(s) wrongly, ie
    just so you can earn more per hour and maybe
    decide to leave them, to travel the world, etc?)

    Actually, I like Philip Greenspun's model of
    5-member companies, who offer services (in
    that case, creating & maintaining database-
    based web sites & the like, I understand).

    Long years of experience in one or a few of
    the group's areas of specialty combined with
    rotating project lead's (eg changing with
    the project) put them in good stead to do
    what you're considering, without risking
    being stretched too far, along the way...

    Go have a look at the model, see if you can
    find a few others with a similar vision, &
    give it a go.

    Good luck! (Come back & tell us how it went)

  • Are you sure? (Score:1, Insightful)

    by Anonymous Coward
    Are you sure they don't do much for you? Unless you're prepared to do business aquisition, paperwork and insurance yourself, you should think twice. Even if you think you're up to taking over these tasks, the company may be in a much better position than a lone ranger especially with regard to attracting business. This was and is the business model of contracting firms after all.
    • i worked for a smaller company (12 employees), and i can tell you the paperwork hassle just for one person was enough to justify an office manager, and they didn't even have a real office.

      in fact, every small company i've worked for, the paperwork has always been a daunting part of it. tax forms, insurance forms, benefits forms, handling the customer, billing the customer, bill management, etc. it all adds up to time that comes from that commision you're company gets.

    • Re:Are you sure? (Score:5, Insightful)

      by stevew ( 4845 ) on Tuesday November 19, 2002 @10:34AM (#4705944) Journal


      Hokay - this is interesting in that someone finally mentioned all the business paperwork ;-)


      First my bonafides - I was self-employed for 7 years, and have worked for a contracting company as an employee for 3 years. So I've seen both scenarios described here, i.e. before and after.


      The health care arguments others have used is specious. It's expensive, but if you are making that extra $15 an hour the company is getting as a commission on you -that'll take care of health care. You have several choices. One guy mentioned IEEE which would work. There are other places you can join the equivalent of a group health care plan too, you just need to look around. Even then, the cost is going to run you between $6000 and $12000 a year assuming a family of four.


      Next let's look at what the contracting company "should" be doing for you. They should be taking care of taxes and sales for you. The tax situation has it's own questions you need to answer - 20 of them actually - as to whether you can get away as self-employed or not. Another issue is that many companies aren't going to want to hire 1099 because of possible tax problems. SO - you probably need to incorporate! Then you become an employee of your own company. So it comes down to - do you want to do the yearly corporate paperwork and tax filings quarterly?


      Next, yet VERY important is sales. Likely you'll get a contract that lasts some number of months. What happens at the end of that? You need to constantly be selling your services to prospective clients. How do you get your name out there to them to even get the interviews? If you have an extensive personal network - maybe this isn't a concern. I lasted 7 years without a problem.


      Anyway - good luck!

  • if you have new work, make the break-out (Score:4, Informative)

    by avoelker ( 553711 ) on Tuesday November 19, 2002 @06:04AM (#4704676) Homepage

    The consulting agency you work for earns it's cut by finding you work between gigs. If you can readily find new contracts without the agency, and you don't need to stay with them for immigration reasons, I suggest you make the break-out and work for yourself.

    The benefits are probably not worth the reduced income unless you have an expensive/precarious medical insurance situation. An important benefit of self-employment is your ability to deduct expenses against your taxable income. Also, the experience alone is probably worth the hassle/expense.

    First, I'd suggest incorporating, either as an s-corp, LLC, or c-corp in your state, for tax and liability reasons. It's not that difficult or expensive if you follow the instructions in the Nolo Press book for incorporation in your state. It should cost only a few hundred dollars, plus a state corp income tax minimum (not additional, if LLC or s-corp) of less than $1000 per year.

    Second, get liability insurance. It's really cheap for contract software developers (as opposed to a product company). I found cheap liability insurance from Hartford via http://www.techinsurance.com.

    Third, follow the procedures and documentation in the Nolo Press book...make stock certificates, do government filings on time, hold periodic stock holder and board meetings...for your corporation to remain legitimate if you get audited.

    Fourth, set-up a company checking account and credit card. Generally, pay for things using these instruments, but you can reimburse yourself. Fund the checking account from multiple clients over the next year or two, to legitimize that you're not an employee of your client companies

    Finally, bill and sign contracts with your clients using your corporation's name. You will be acting as an agent of your corporation. You can set-up QuickBooks and bill them with the generated invoices using agreed upon terms, typically Net30, which means not being paid until 30 days after submitting your invoices.

    Lastly, IANAL (I am not a lawyer) and IANAA (I am not an accountant). Please use your own judgement and advice of professionals or good publishers like Nolo Press. Good wishes.

    -avoelker
    • Very interesting, but if I'm reading you right, you are suggesting setting up a publicly held corporation (stocks? board members?). I know very little about this, but wouldn't a private business be the first step? No stock. No board members. Just you. In fact, a "Doing Business As" might just suffice (plus liability I assume) before incorporating.

      Also, I'm very interested in the feasibility of a non-profit "coop" (like a grocery coop, or a credit union) which acts sort of like a contracting agency by attracting/finding work, but also uses the combined bargaining power of the members to get a group healthcare plan, which would seem to be the major downside of working independently. Any advice there?
      • (As a diclaimer, I've run my own side business for a few years now.)

        Privately held companies have stock as well. The shares are just...privately held. Usually only the members of the board (who are members of the company) own them. It's necessary for an LLC/Corp type structure, as it shows that the board owns part of the company.

        What you're talking about (the "DBA") is a Sole Proprietorship type setup. VERY easy to create. just use your SSN as a business tax id. However, you have NO corporate protection. That is, you assume all liability for your work, and if you are sued, the plaintiff can go after ALL your property (including personal!), not just business assets.

        keep in mind, though...IANAL/A
        • The proble with the DBA, i.e. sole-proprietorship is that you need to have multiple gigs per year to make the IRS happy. That's why the corporation is a better answer. I was lucky enough to get a couple gigs that lasted 2-3 years each. This back when the 20 questions weren't as onerous. Now-adays, I would go the incorporation route.
        • However, you have NO corporate protection. That is, you assume all liability for your work, and if you are sued, the plaintiff can go after ALL your property (including personal!), not just business assets.

          Not necessarily so: the LLC/LLP (Limited Liability Corp or Partnership) is set up specifically to address this. I was researching this for my organization, and all states but Massachusetts and DC allow Single-Member LLC's as well: all the ease of the sole proprietorship, and all the liability protection of a corp. Check it out, at least, before you set anything up.

          I think this is the 3rd time on this discussion that I'm saying "consult an accountant." I never realized how important it is.
          • If you'll note, my comment was regarding a Sole Proprietorship specifically. I know about the LLC type of incoporation.

            The only drawback I've really seen to that is that it's still somewhat "untested" in courts. There are large bodies of law to handle S/C-Corps and Sole Proprietorships, but relatively little for LLCs.

            again, IANAL.
            • If you'll note, my comment was regarding a Sole Proprietorship specifically.

              I know, and my comment was only intended to clarify that there's a new type of beast, the SMLLC, in many jurisdictions which kind of gets you the best of both worlds. Yes, it is new, and so no, there's not much case law about it. Point taken.
        • An LLC does not have a board of directors or stock. AN LLC has a membership agreement (it is like a partnership agreement). And if it is a one person, or Sole Propieto LLC, you don't need a membship agreement eigther. Your state may or may not make it real easy to create and LLC. My state (Wisconsin) lets you set up one on-line easily and cheaply.

      • Corporations (LLC, S, or C) have stock, stockholders, and a board of directors. This has nothing to do with being public or private. In fact, you can start a corporation where you are the sole employee, stockholder, and director. That's what I'm suggesting.

        -avoelker

  • quitting? (Score:2, Insightful)

    by Anonymous Coward
    dude, you've got a job ... and possibly more on the way through the contracting company. some of us are still left out in the cold hoping even for that much.

  • Check your contract (Score:4, Insightful)

    by joebp ( 528430 ) on Tuesday November 19, 2002 @06:44AM (#4704777) Homepage
    I used to work for a contracting company similar to yours; a clause in each contract was I was not allowed to be employed by the same clients for 12 months after I stopped contracting with that company - whether with another contracting company or freelance.

    You may find you're going to have to find a complete set of new clients.

    • If you live in a "Right To Work" state, these contracts are unenforceable.

      I live in Virginia, a Right To Work state, and such so-called "non-compete" contracts are considered "restraint of trade".

      You can sign them, but they are merely scare tactics to scare a contractor from defecting. In reality they are unforceable.

      I have never refused signing one, however I have pointed out that they are unenforcable AS I have signed them. In reality by not signing one you would be saving yourself, and your company, legal costs (That they would ultimately lose in a Right-To-Work state anyway.)

      You may be doing both yourself and an employer a favor by refusing to sign one of these. Though they may not view it that way.

  • Perhaps less useful to you, but here is the UK perspective:

    I work in the UK and have set up a private Limited Company. My current contract is for a 3rd party via a contracting agency, who take commission etc as you describe.

    In the UK, your arrangement is known as an Umberella contract, where the agency take care of employer taxes and pay you a salary.

    However, I am the director of my company and can source work independently of the agency (with usual exclusions for existing client).

    Is this arrangement possible in the USA, it's a good first step.

    It gives you the freedom of being Independant but also leaves open the Contracting Company fallback.

  • save (Score:3, Insightful)

    by battjt ( 9342 ) on Tuesday November 19, 2002 @08:27AM (#4705141) Homepage
    Keep 6 months salary in the bank.

    You'll need it to cover unexpected expenses when out of work. You will be out of work. You will be out of work more than when working for a contract house, because a contract house has full time professional sales people that are better than you and you will then be competing against.

    I wouldn't worry too much about the health care. Buy some catastrophic insurance and keep that 6 months savings. Buy disability insurance. (The insurance to cover the first 6 months is the expensive stuff.)

    Don't incorporate unless you must to work with particular clients. The paper work is killer.

    Get an accountant that you trust.

    Keep a couple customers in good standing all the time. If it is just you try to work for more than one client at once (40 hrs here, 20 there) so that if one has to drop you, you still have some cash flow.

    Joe

  • I'm trying, & it's tougher than you might thin (Score:4, Insightful)

    by mactari ( 220786 ) <rufwork AT gmail DOT com> on Tuesday November 19, 2002 @09:42AM (#4705541) Homepage
    I recently got fed up with an inefficiently-run government contracting position and decided if I wanted thinks right I was going to have to follow the proverb and do it myself. I've set up the home office about a month ago, and here are a few of the lessons/insights I got real quick.

    1.) Getting started takes a LONG time. Even if you hack at home now in your free time, you're going to need a few days to get your office right. Getting your workstation to exactly mimic the productive suite you were used to at work will take a while. Getting a website to feature past experience and show off your new wares is going to take a while too (but will pay off in the long run). Now add overhead for buying office supplies and, much more importantly, registering your company with your local gov't to reduce liability, and you'll see you're not going into business immediately. Plan for at least a month of downtime at the start (or sprinkled around your first code) for you to get the infrastructure to *start* ready to go. (aka, "MAKE SURE YOU HAVE SOME MONEY SAVED FOR FOOD AND RENT!!!" :^D)

    2.) You're doing it *all* now. I'm able to finish bits of code much more quickly without the distractions of the water cooler (and intrusions into my cube), but once I'm done, now what? Marketing is no longer "the communications department's job". Nor is tech support someone else's responsibility. Nor polling the customer to see if I've hit the mark. Nor is handling the overhead if a customer is upset. All docs, all testing, all support, all "everything you didn't worry about when you were coding" is your responsibility. It's all you. Note that the side lesson is that if you can bring anyone with you -- or if you can use past contacts as subcontractors, that's a huge help while landing and when you finally land a big fish.

    3.) Good luck finding the customer. Don't get the unrealistic idea that you're going to be able to spend all your time coding. As another poster pointed out, if you've already got work lined up, enjoy! But I recently spent about two and a half work-days on a 4 month job proposal which didn't get selected ("lack of previous experience" -- and I've been working in the field before this for 4 years! New companies are certainly at a disadvantage). That's time "down the drain" (though certainly I can cut and paste some of one proposal into the next), and you have to consider this as part of the cost of finding a guaranteed customer. In my "downtime" I'm writing a trialware application, but unlike contracts there's no guarantee anybody's going to want to buy. Don't underestimate how much work your current company is doing for you by finding the work.

    4.) Multiply everything by three -- Time for projects, costs for supplies, costs for advertising and submitting proposals. I'm sure if you've worked more than a few years "in the real world" you've learned this one already (boy, I sure did), but it's worth keeping in mind. You're your manager now too, you know! Don't say you can name that tune in two months when it's going to take six. Having a poor experience with your first customer isn't going to help you find that second and third job.

    That's the short lesson from my first month of working out of the home. It's fun, I get a ton done, all the code is done up to my personal expectations and written efficiently, but I'm still looking for my first "real" customer. Best of luck.
    • I agree with Mactari's general points. I would also add that it's easier to get a business going on the side first and then when you have some cash flow, then make the jump to full time work. Theoretically you could make your company, work on the weekends, find contracts, and still keep your day job - just hire some independents to do work for you. When you have enough and less worry, you can jump too.
  • I'm also such a contractor at the moment, working at a government agency. Government at least won't contract with individuals, they only work through a very small list of approved contracting agencies (at least in this state). Most of these contracting agencies here were started by ex-employees of the government agency they contract with, so there's a definite networking system in place. Basically, I would expect many larger companies to work the same way, so I wouldn't get my hopes up trying to get personal contracts with any significant company. The most likely candidates are probably small(er) companies, which will probably also pay less, so you'll need more concurrent contracts and more hours working.
    • Government at least won't contract with individuals, they only work through a very small list of approved contracting agencies (at least in this state).

      As an independent contractor, you can often subcontract through these companies. Of course, they still take a percentage of each hour you work, but it's probably less than what they'd take if you were one of their employees.

  • That is the question you need to answer.

    Your company might be getting a cut on every hour you work...but if they find you gigs then it is worth that cut.

    Unless you have solid contacts with corporations, previous employers etc. who can give you temporary gigs it is not worth the risk.

    And dont believe in monster or dice to become independent.

  • Be Careful, Don't Burn Bridges, but Do It! (Score:4, Insightful)

    by rkent ( 73434 ) <rkent@post.ha r v a r d . edu> on Tuesday November 19, 2002 @11:12AM (#4706274)
    Recently, however, I have begun to realize that for the past two years they haven't really done much for me, yet they still get a commission for every hour I work.

    First and foremost, learn to question your assumptions. You say "they haven't done much for me" but they still get money for your work. Thing is, you HAVE work -- you seem to think that striking out on your own would also include full-time occupation, and I can tell you right off, that's almost certainly not true. The reason so many consultants ask $75 or even $100 per hour is because they're lucky, especially now, to find 6 months of full time work per year. So, have something lined up before you quit!

    Also, be careful about what you decide to take. You may have signed something with your consulting firm promising not to compete or poach customers for a year after your contract; their client (where you work) almost certainly signed a similar document promising only to hire you through them. See if any friends or family can help you out with something, anything small. That's your advantage, IMO, as a completely independent dude: you can take any job, even 40 hours over 3 weeks for 2-3 grand, that a bigger firm wouldn't consider. Capitalize on this.

    Don't quit even when you line something up! Try to do whatever work it is, after hours and on weekends, or scale back your day job duties by 5-10 hours per week. But your firm is a great way to make contacts, so don't dump it until you're SURE you're ready. How will you know? If you don't know, it's not time.

    That said, I would seriously recommend taking steps towards being independent. I've been independent [rjk-comm.com] all year now, and there have been a couple of scary months, but it's been fun and I've learned a LOT. The way I work is this: I formed a LLC in my home state of Michigan at the advice of an accountant (oh yeah - get a good one of those, too) because of the way it helps with taxes. Now, since I'm a software consultant, all of my computer equipment is bought before taxes. I get to deduct car expenses for time spent driving to work. I can start my own Keough retirement plan, and my health insurance (while minimal) is 70% tax deductible. There's too many advantages to mention. Just email me if you want to talk about it.

    But definitely be careful and don't piss off any connections that might do you well later. And DON'T go behind your agency's back and ask one of their clients to illegally break the agreement -- you'll just look like a slimeball who can't deal with the real world.
  • Incorporating is a lot of work. If you're the kind of person who can work 8+ hours a day, then come home and do paperwork for your business, then go ahead.

    If not, there are some self-service consutling companies out there such as FreeAgent [freeagent.com] and ZeroChaos [zerochaos.com]. They do the billing, taxes, 401(k), insurance, direct-deposit, etc. You pay a monthly fee (~$300) plus insurance premiums.

    But when your contract is over, they don't find you a new one. And they don't pay you until your client pays them, so be prepared to get paid irregularly.

  • I have a book written by Janet Ruhl, published by John Wiley and Sons titled "The Computer Consultant's Guide" subtitled Real-Life Stratagies for Building a Successful COnsulting Career. It gives a lot of tips and pointers on doing your own contract / consulting work. It goes through all the business and legal issues you might face. It's ISBN 0-471-17649-4
  • That commission also pays for:

    • You working under that companies name. Giggles & Co. wouldn't have access to the same sort of contracts.
    • The company finding work for you. This is big. If you are anything like me (wich you may well not be) you are great at what you do, and great at maintaining clients, but can't cultivate them worth a damn.
    • Dealing with client BS. How do you feel about hiring a lawyer and having your personal resources on the line (unless you form an LLC) when a client decides to sue? Do you have a strong desire to develop a working relationship with a collections company? What's your plan for getting a piece of the pie when a company goes out of business and liqudates while owing you for services rendered?


    I'm not saying don't do it, or that contracting companies are saints, but you are getting something for that comission.

    -Peter
  • I kind of avoided this whole issue. Self-employment can be a real hassle.

    I found a job, then found a firm that would handle my contract billing and pay me W2. That worked out great. I billed at one rate, they kept 14% (and paid their part of the taxes out of it) and I got the remainder W2. I added medical for $1/hour. I would have had to give up a little more percent if I hadn't gotten the job. This worked out fine for many years.

    Other contract firms usually took a minimum of 30% and up for the privilege of employment through them.

  • My advice (Score:4, Insightful)

    by dubl-u ( 51156 ) <2523987012@pota . t o> on Wednesday November 20, 2002 @02:08AM (#4713473)
    I've been freelancing for six years now. I agree with many of the things others have said, especially about having a big savings cushion. But here's my big piece of advice: Getting work will be much harder than you think.

    Once you go own your own, you go from being a technical person to a marketing person. Network relentlessly. Join user groups. Collect recommendations. Get and stay in touch with old colleagues. Write articles. Schedule plenty of time for keeping up on the latest skills and the latest buzzwords.

    My tip: start out by getting part-time work. Don't quit your day job until you have so much outside work that you can't stand it anymore.

    Also, I'd recommend that you read "The Computer Consultant's Handbook"; and Weinberg's "The Secrets of Consulting." The first one's a little old and the second one is focused more on consultants than contractors, but you will find both helpful.

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