Inside Colin's Head

This entry was originally posted on one of my now deceased blogs: August  23, 2008. Some of the information is out-of-date for my personal situation, but I think most of it is pretty good information to share!

I recently started work as an independent software contractor (Something Future) and wanted to share a few things that I've learned so far. I know that when I started I was a little intimidated and confused about how to go about getting it all set up. Aside from some leg work, it was actually not that painful. And it was fueled by the adrenaline of starting my own biz. :)

Let me just start by saying that although I have a good business head on my shoulders, I really don't get excited about dealing with legal stuff, required forms, and otherwise coloring within the lines. So, for anybody who might be similarly irritated by such issues, I've found that it hasn't been too bad if you keep it simple.

Get Incorporated

First off, I had a pretty good experience with The Company Corporation for becoming incorporated. You really should get incorporated (file as an S-corporation) if for nothing else than to make your business official (both to your clients and to yourself). This ran me $270 and although the application only took a few minutes to submit, I wasn't truly legit for about 25 days. You can still do business while your information is processing, but I would be upfront with people about it and on documents use "Incorporation Pending" next to your business name.

Do NOT pay to get a federal tax identification number (otherwise known as an EIN). Read a bit further to see why.

Name selection for your corporation is very important, in my opinion, if you offer creative services. This name can be anything, the government doesn't care as long as when officially listed it ends with "Inc." or something similar. I choose "Something Future, Inc." because it's catchy, fun, and is suggestive of the work that I do. Some contractors will put "Consulting" directly in the name, and many simply use their last name as the business name.

Register for an Employment Identification Number

You'll need an EIN or a federal tax identification number for the IRS and for various other accounting services that you might run into. At first I was made to think that this was another 1-2 week, irritating process of sending snail mail, etc., and was almost ready to pay over $75 to The Company Corporation to get this done for me. However, I found that the IRS actually has a kick-ass, super-quick, website for registering your EIN...for free and a turnaround time of about ten minutes. You'll probably have to wait on this step until you actually receive your incorporation documents from the previous step.

Get Business Liability Insurance

This is some basic insurance that will protect you in case you get sued for totally botching a contract with one of your clients. I mostly think of this as protection from nutbags out there that mess up their project themselves but try to blame it on you. Additionally, some clients (especially if you subcontract for another contracting company) will require you to have this insurance.

There are websites out there like this that offer this insurance for you, but I was able to get this cheaper and more easily through State Farm, which is who I do all of my other insurance through (car, house, etc.). This really just took an e-mail to my insurance agent and then a phone call to pay for it, and it ran me $232 for a full year.

Get a Website

This is pretty 'duh' for software peeps, but there still are a lot of contractors out there who don't have a (good) website to direct people to. It can be super simple at first (just list your phone number and e-mail address), but it needs to be a nice-looking, functional website. You will be judged by your website.

Sign up for Google Docs

If you haven't already used this freaking awesome (free) service, you need to sign up for it right now. Google Docs is the perfect place to store contracts, legal and tax documents, and much more, and it's totally backed up for you and keeps track of revisions! I usually create a PDF of my important docs and upload it to my Docs account.

UPDATE 2010: Of course if you are doing work in the legal industry, I highly suggest using Dialawg!

Accounting

I really hate the tax aspect of this part, but the general organization part is actually kind of fun.

Buy and download Quicken (I use the Home and Business version) for $100. At first I was really excited about this software, but then I started seeing the product definitely has some ugly and annoying aspects of it beneath the covers. That being said, it's actually functioning is rock solid and perfectly suited for my needs. Set up your bank accounts and your business and make sure to tag your transactions with some sort of a "consulting" tag so that they are flagged for tax deductions.

I can't recommend FreshBooks more for invoicing software. It kicks ass and a ton of features are free. Upgraded accounts are very reasonable and you can even send invoices by snail mail if you like. Make sure to also record your invoices in Quicken as you create them (but I would really recommend not worrying about using Quicken's full invoicing tools -- they blow).

UPDATE 2010: I have to advise against Quicken now and suggest just using FreshBooks and Mint.com. Quicken is just too clunky and overbearing in my opinion.

Banking

Now that you're not under an employer's wing, you need to step up your banking habits a bit. I would suggest adding a savings account that is explicitly for tax money. Put 30% of every invoice payment that you get into this account (that's a pretty conservative amount, but better safe than sorry here). You'll want to pay quarterly taxes and having this money in a easy place is critical.

Also, since you probably won't have an active 401K anymore, you can now set up an owner-owned 401K and make deposits whenever you feel like it. Get all of your existing 401Ks rolled over into this account and make sure to make regular deposits so that you can eventually retire.

I also set up one more account, a brokerage account for emergency money that might earn as much as 8% interest (and can also lose money of course). I worked with Chase and will have all of these accounts at my fingertips completely from their websites. This means transferring money around to my checking, account, brokerage, and 401K. To me this is a critical part of your business set up. I had to meet with an investment manager at a Chase branch more than a few times, but he is doing the work to get this all set up for me. This definitely was the more drawn-out processes than most, but it is obviously super important.

UPDATE 2010: I recommend against Chase. Read my rant when you're finished with this post.

Quarterly Taxes

You'll need to get an accountant, though this has been far and away the most irritating piece of getting started for me. I just want someone that I can work with over e-mail because I don't have the time to make a thousand phone calls and visit my accountant in his office; so far I have not found someone who can work with me in this manner. Once you have a good accountant, she should take care of filing your quarterly taxes and as long as you are religiously using Quicken (or something similar), this should be a simple effort on your part.

UPDATE 2010: If you're in Indianapolis, I've had a very good experience with David Goss from http://www.coxbeckmangoss.com; tell him Colin Mathews sent you.

New Habits

At the end of every day, I make sure to log my time on FreshBooks and log any miles that I drove in Quicken (with their vehicle mileage tracker). On Friday of every week, I send out an invoice to my clients. For clients for whom I've logged about 40 hours, I create a brief (but beautiful -- including screen shots) document listing all of the things that I accomplished for them that week. This document always has my website, e-mail, and phone number on it. At the end of a long-ish contract with a client, I send them a detailed PDF listing all of the work that I did for them, screen shots, a personal thank you, and information on how to contract with me again.

The whole process has been pretty fun for me so far and although it's only my second month, I'm currently running three contracts right now and have several future prospects lining up! Good luck to anyone going through something similar and I hope this information helps you get the gumption to get started!!

UPDATE 2010: I totally don't log my miles anymore, though I guess I'd still recommend doing it. It's just a pain!