It may be one of the worst bills around....Let's start at the beginning.
California has signed into law AB5 which goes into effect on January 1, 2020. The main point of the bill is that clients will now be required to make their freelancers employees. They are spinning it to claim it's so that freelancers can have health insurance, benefits, PTO, 401k, etc. Now, OF COURSE, I think ALL of these things are important, but there is a reason why we decide to work for ourselves and we fully know that we have to now handle these items on our own.
And there are countless reasons why someone decides to work for themselves. It's not always because they don't want to"work for the man". It could be due to disability, having to care for a loved one (new baby, ill family member), living in a rural area, the economy (I live in an oil/gas town and our economy changes every 5 minutes, heck, even criminal records. Not all criminal records are for horrific crimes that we automatically think of...there are countless reasons, but these are just a few I could think of at the moment.
This bill affects almost all industries but does have automatic exemptions for some (lawyers, doctors, things like that). Another exemption is for B2B services providers.
What is B2B?
B2B means business to business services providers. A B2B is when a business makes a commercial transaction to another business. ("Commercial" refers to business transactions. "Consumer" is for consumers transactions)
What makes you a business?
You are legally considered a business when you incorporate with the appropriate government and regulatory agencies. You can incorporate as a Limited Liability Company (LLC), Corporation, Non-profit, LP (Limited Partnership), etc. Some still refer to themselves are freelancers after they incorporate, but they legally are a business. Side note: Technically there is nothing wrong with you doing this, but I don't recommend it. Part of being a business and keeping the protection it gives you is that you have to accurately portray yourself as a business. Could massive harm come by doing this? I doubt it, but might as well get out of the habit.
Actually, while we're on that topic, for the B2B exemption to stick, you have to operate as an actual business (as you should be). That means, keeping up with any required annual filings and fees, taxes, displaying LLC (if you're an LLC) where you are legally required to, working at your own place of business, setting your own hours and rates, clients do not pay your taxes or benefits, keeping business funds and transactions separate from personal, etc.
If you do not do this not only have you lost the protection being incorporated gives you, can face legal issues and fines, run the risk of being banned from operating as a business in that state, tax implications, but also violating AB5.
What is the benefit of incorporating?
There are a lot of benefits and the number one benefit is that you are protecting your personal assets. What does that mean? If you find yourself in a legal situation, with a client and they sue you and win, they can go after your personal assets to collect on their "winnings". Home, land, car, bank accounts, etc and if you don't think you have assets, the courts can (and will) place a lien on you and garnish your wages and bank accounts. By the way, a garnishment on your bank account comes with ZERO notice to you. Your bank receives a court order and takes EVERY PENNY available in the account. Yup, this is fully legal. I'm a Licensed Bank Auditor, so I know 1,000% this is true.
Now, if a non-client sues you, they can go after your business. The same things happen, just with your business assets and business bank account(s). Why would someone sue you? Car accident, your dog attacked your neighbor, medical bills - anything. I hate to use this story, but it really hits home...
A wildly successful baker had some of his friends over and they were riding ATVs on his land and one of the men had an accident and died. The baker never incorporated his business and the family sued him and he lost everything. Personally and the business. Things happen people. We can do everything right in the world and things still happen.
Okay, that was dark...other benefits are tax writeoffs, clients view you as a "legit" business and enhanced brand reputation, it gives YOU more confidence in your business (I believe this to be true), it is easier to obtain loans, angel investors, venture capitalist, easier to sell the business, and the business will be perpetual ("lives" forever) if you so choose.
But it's SO expensive.
No, it's not. Since this bill is coming from California, let's talk about California. It is $90 to incorporate in CA and every 2 years you file a Statement of Information for $20. Now, the minimum annual tax is $800 and yes, that is a lot. But the legal protection you get blow that fee out of the water. Set aside 66 bucks a month and you're good to go.
Just get business insurance.
I do recommend this if you are incorporated or not, BUT business insurance is just like every other type of insurance. There is NO guarantee they will pay out the claim or all of it. So if you are sued you've paid for insurance that did nothing for you and you would have paid the amount of incorporation costs 80x over with the insurance premium!
Well, just incorporate in another state if you live in California, such as Delaware, they are a "business-friendly" state.
You still have to file in the state you live and operate from. All you're doing is creating double the work for yourself. Doing this only benefits a SMALL percentage of businesses, but it still has double the work even if it does benefit you and usually it's LARGE multi-billion-dollar businesses.
Okay.... So , what have we learned? Incorporation may be the right step for you to comply with AB5 and retain your clients and sign future clients and give you additional benefits. I say "may" because it is not right for everyone - I certainly don't mean that as a forever statement, but your specific situation is unique and should be treated as such.
This bill is causing a lot of stress for us, but please do not make any hasty decisions. Doing so will only create more problems. I am here to educate, direct and support you and help you make the best decisions for YOUR situation. Please leave your comments so I can do my best to clear things up for you and/or point you in the right direction. And, as always, you can book a complimentary consultation to see if incorporation is the best option for you.
I will keep you updated on this bill and provide various resources for you as well. Follow us and Urban Consulting on FB as I already have some resources up there on this topic such as an amazing FB group, websites, articles, and sign up for our newsletter to get notified right away of new updates and blog posts.
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