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by justinpowers
1491 days ago
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This is very interesting. Similar to a path I almost went down with some partners, but it fizzled due to too many unknowns and lack of energy to research them. Would you be willing to expound on your arrangement? Either here or privately. In particular… What legal structure are you each using? sole proprietorships, llcs, s-corps? (Assuming you’re US based) Are there any tax benefits/costs to this arrangement? Has the government hassled you regarding the arrangement? (It sounds like it has, but…how exactly and how did you respond?) Have counterparties hassled you or been scared off? Do they even “know” of the arrangement? Are there significant legal/transaction costs between the three of you? If not, is that simply because you have strong trust in each other? |
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We've used a mix of ALL of the above. Right now, it's two s-corps and an LLC. That's the nice thing, there's flexibility in how YOU want to structure YOUR stuff and do so optimally. UNFORTUNATELY, we're all California based, so sole proprietorships are probably out now.
>Are there any tax benefits/costs to this arrangement?
Yeah, so you lose out on economies of scale that would come by having ONE set of books, ONE accountant, an HR department, etc. However, that gets offset a bit by having total control and flexibility in how you structure your tax write-offs. On balance, I think I come out ahead this way, but it's a bit more unbillable work.
>Has the government hassled you regarding the arrangement? (It sounds like it has, but…how exactly and how did you respond?)
Yes, the CA EDD was kind of a nightmare to deal with over this issue during an audit which was for the year or two BEFORE the ABC test came into affect. It all mostly worked out but they just could NOT get it. We kind of lucked out there.
>Have counterparties hassled you or been scared off? Do they even “know” of the arrangement?
Basically, no, but they don't really know the arrangement. We have a sort of sub-contractor agreement that spells out who carries insurance liability for a particular job, and some other details. (I'm fuzzy on the details, it's been a while).
>Are there significant legal/transaction costs between the three of you? If not, is that simply because you have strong trust in each other?
Transaction costs are very minimal. We have contracts specifying the nature of payment and negotiations, and a clearly defined structure for who "owns" particular clients. That said, trust is paradoxically very high despite what I'd say is in some ways a very low-trust structure. The essence of the idea was to take all the stuff that would normally have to involve an army of lawyers and whatnot and convert it to something that can be managed as a free market.
Beyond our core team, we have several people that form a loose coalition of professionals we occasionally rope in on projects as well. This lets us grow or shrink out team in a really quick-to-adapt way without really making anyone feel responsible for anyone else's livelihood. Since we're regular partners on projects, typical transaction costs and negotiations are very minimal.