Starting a Supplemental Staffing Agency: Help

HarryHK · Jan 14, 2006

Nope, you don't need a business license in any state. The only interesting exceptions that I know of is registering your agency in Washington state with the nursing board, and having to have a local office in Rhode Island.

You are organizing an S corporation. This is not a business license (nor do you need one). If you want to, you don't even have to do that, you can be a sole proprietor. Personally, I'm a C corp, never understood the S corp advantages. As far as I can tell, it is only the ability to pay yourself a "reasonable" salary and pay the rest in a K-1 which is not subject to FICA. To balance that, you can have profit sharing in a C corp that is not subject to FICA, all health care costs are deductible for yourself (not just insurance), and if you want to retain equity so you can meet payrolls, you can't do that in an S corp.

You need an EIN from the IRS. But there is no filing other than quarterly withholding taxes - easier to leave those details up to your payroll company.

eddy · Jan 19, 2006

Nope, you don't need a business license in any state. The only interesting exceptions that I know of is registering your agency in Washington state with the nursing board, and having to have a local office in Rhode Island.
You are organizing an S corporation. This is not a business license (nor do you need one). If you want to, you don't even have to do that, you can be a sole proprietor. Personally, I'm a C corp, never understood the S corp advantages. As far as I can tell, it is only the ability to pay yourself a "reasonable" salary and pay the rest in a K-1 which is not subject to FICA. To balance that, you can have profit sharing in a C corp that is not subject to FICA, all health care costs are deductible for yourself (not just insurance), and if you want to retain equity so you can meet payrolls, you can't do that in an S corp.
You need an EIN from the IRS. But there is no filing other than quarterly withholding taxes - easier to leave those details up to your payroll company.

S Corp isn't a business entity at all. It is a tax election. There are considerable benefits to electing S Corp status depending on an individual's financial situation. See a qualified tax accountant for more info.

HarryHK · Jan 19, 2006

S Corp isn't a business entity at all. It is a tax election. There are considerable benefits to electing S Corp status depending on an individual's financial situation. See a qualified tax accountant for more info.

OK, Eddy is right. When you file your first 1120 tax return, you have to state your filing status, either C or S or other. Again, I'm unsure what the benefits of an S corp might be - they are unlikely to be substantial. If there is any doubt in your mind, you could ask actual business owners of the type of agencies, or do some reading in business books in the bookstore. Both will gain you background information and depth that an expensive accountant is unlikely to provide. And remember, accountants only know books, they are not so great at actual business decisions.

If you are primarily starting a staffing agency to hire others, there can be some benefit to an S corp. If you are primarily doing it to obtain contracts for yourself (which is what I primarily do), the numbers I have crunched all show that I'm better off with a regular corp, both financially, and audit risk wise (no K-1 filing or hanky panky).

eddy · Jan 20, 2006

There are several substantial tax benefits to electing S status, again depending primarily on your financial situation (a combination of total household income, marital status, current non-business deductible expenses, etc.). Probably the most important and most obvious advantage...

Passthrough taxation. The distributions from the company are taxed at the personal level only, as opposed to the company level and THEN again at the personal level with C status, which can lead to double taxation on dividends (once at the corporate/company level and again at the personal level when you take dividends). Keep in mind that you will need to give yourself a "reasonable" salary either way and this CAN allow you some flexibility in terms of avoiding this double tax with C corp status. However, you will want to pay particularly close attention to the various tax brackets when trying to minimize your tax liability with C status. Unless you are taking 100% of your C corp profits as SALARY, you will be subjected to double taxation. Besides, that would be a really silly thing to do.

Now, truthfully, you should probably consider an LLC taxed as a partnership when you start out. You can later elect to be taxed as an S corp with this entity anyway. There will be less paperwork and you get the same basic benefits for the most part.

Honestly, you can read a bunch of books on corporate entities and tax elections, but is that what makes you money? No. Will you be qualified to make sound decisions all by yourself regarding business entities and tax elections after reading "Business Entities for Dummies" or "Taxes for Dummies", etc.? What if you are wrong? Let me rephrase. Would you send the most talented doctor in the world to put out a fire or would you choose a fireman? Likewise would you want the most talented fireman to perform a delicate surgical procedure on you? Use the best person for the job. If the best person isn't you, then perhaps you should consider finding them.

You need to focus on what you are talented at and surround yourself with advisors that are capable of providing you the advice and services you need to grow your business and your wealth. Trying to be a jack of all trades will result in you being a master of none... and will result in you making some serious mistakes both legal and money related, not to mention it will distract you from what MAKES THE MONEY.

A couple hours even with an EXPENSIVE and highly qualified accountant should only set you back maybe $300-500 max. MOST will do an initial meeting for free as a way to gain your business and prove their abilities anyway.

I see very little reason for a startup to elect C corp status out of the gates, and I see even less reason how it could possibly be an advantage to Harry's small operation.

I was an accountant and owned my own small firm for many years, and I have consulted for hundreds of clients from startup to succession and everything in between. Don't take this the wrong way, but Harry, without even looking over your financials I could still safely say you have probably paid far more in taxes than you would have if you had gotten better advice from the outset... much more than a couple hundred bucks for a good accountants time.

HarryHK · Jan 20, 2006

In 2005, I zero balanced my C corp, thus paying no corporate taxes (other than 15% on the 50% non deductible portion of M&IE - on just that one item my total tax burden would have been $3,000 higher in an S corp). I covered all health care costs, paid myself housing stipends and per diems free of personal taxes, maxed out my profit sharing and personal 401 contribution. Ended up with close to $90,000 more in my accounts for the year (including tax deferred accounts) for nine months work (average 43 hours a week). This includes all my personal costs for the entire 12 months (but does not include investment gain. My personal federal tax bill? A little more than $5,000. I did that by reading tax codes and books, did not pay $500 for "expert" advice. I know several agency owners who did. They ended up having to seek the counsel of several lawyers to correct the errors of the previous counsel. And I did that with very conservative approaches to deductions. None of this stuff about deducting new computers and cars that some aggressive incorporation books recommend. I want a return that is problem free in a review or audit situation.

You are certainly welcome to seek the advice of professionals but those are extremely costly lessons for things a small business person has to understand to make good decisions. If you have to lean on them a lot, you will not have any profits. Certainly needed for larger businesses but for small businesses, my advice is to read until you understand what is involved. Without a "fire" to put out, they are not needed.

Accountants and lawyers often get way too caught up in minutia to be truly helpful on things like entity choice and how to proceed in what is a very simple business. Help from peers is a better, cheaper way to get relevant advice in my opinion. I didn't do it myself because my knowledge from working in my industry (travel nurse) and what I could read in IRS docs and contracts was enough. For those who need more help, a search for national nurses in business will get you a bunch of help from nurse entrepreneurs for very little money (I believe $70 a year).

Just my two cents. I have no doubt that from your perspective you have seen many businesses make very costly tax decisions, but there is just not that much way to go wrong here (for travel nursing anyway). I've been doing this for three years now, started as a sole proprietor to make it easy. Even taking an exorbitant K-1 distribution, I figure it would have cost me close to $10,000 more to have had an S corp last year. But as I said, it can be a good choice for some.

eddy · Jan 21, 2006

So you were able to show zero income at the corporate level with the exception of meals?

What salary did you pay yourself? Did you pay payroll taxes associated with this? How much?

I'm sorry to be the skeptic, but I just don't see how this ($90,000 in accounts) is feasible following IRS tax code.

HarryHK · Jan 21, 2006

OK, without actually publishing my corp income statement, here is a rough breakdown.

Revenue $130,000

Subcontractor $35,000

Lodging $35,000

M&IE $15,000

Misc $5,000

Profit sharing $6,000

Benefits $4,000

Compensation $30,000

Of my salary, I deferred $18,000 to my 401. That $30,000 amount also includes employer FICA and other payroll taxes. FICA income was $26,000, withholding was $2,500 including several state tax authorities (the $5,000 figure in my earlier post was just off the top of my head), net pay was $5,400.

So, total net pay and reimbursements to me:

Salary $5,400

Lodging/M&IE $50,000

401 $24,000

Total $80,000

Actual housing costs for the whole year (not just the nine months I worked) were $10,000 (higher than usual). Food costs was on the order of $3,000 (I cook). That leaves only $67,000, so my $90,000 was a little high. There was a bit more in the categories of travel reimbursements that exceeded my costs (including maintenance and insurance) so around $70,000. So that is my net banked amount (although a third of that is subject to income tax when withdrawn). I apparently included some investment gains in my original estimate. So you are right, partly.

Since I use cash accounting, my federal corp taxes are an expense for 2006. Hope that makes things clearer.

Interesting thing about relying on professionals. My own mother, who is a CPA, has done dozens of C corp tax returns and never paid taxes on M&IE. Just took the 50% straight deduction. I even called the IRS and that is what they suggested as well. Despite how much is talked about this item, I could not find any tax court rulings on the matter. Clearly that is correct method for sole proprietors and other pass through entities and there is direct guidance to that effect in IRS documents. But for a C corporation who actually pays the M&IE to another entity (the employee), it is just as clearly wrong.

And as it turns out, doing it the right way and paying corporate taxes on 50% is not only the right way, but reduces my total taxes as well. In the case of last year, I ran payroll taxes both ways (straight deduction versus paying on 50%) and saved three to four thousand dollars my way. (Which is where my $5,000 personal taxes figure likely came from - doing it the other way).

The part of this that I had a big issue with was figuring out how to reconcile these numbers on my corp tax return. Was really hard to get my head around it. Since my total revenue is below threshold for Schedule M-1, I did not do it last year. So when I actually did my tax return and added M-1, it was a breeze to reconcile the difference between costs and equity. I suppose if I was an accountant, and doing accrual method, this would be much more clear to me. But accountants seem quite uncomfortable with the cash method that most small businesses who are allowed to use, actually do use.

Accountants are full of wonderful terms like liabilities. Spare me! If I incur a liability, I pay it and book it as an expense. I ran my return by an EA friend of mine and he called my handling of M&IE "income splitting". I understand the concept, but as a non accountant and without retained earnings, it is hard to place in this context. Thank goodness I don't use an accountant, not only would I likely run up significant professional costs trying to figure out what they are saying, I would also end up paying more taxes because they are not as up on my special situation as am I.

Accountants and lawyers have their place, particularly in special situations and for larger companies. If I ever need an accountant, I will have to read "Accounting for Dummies" just so I can speak the same language. Seems unlikely unless I become a full service agency, not just for contracting myself primarily. It is just not that hard.

dreamlandeals · Jan 27, 2006

Nope, you don't need a business license in any state. The only interesting exceptions that I know of is registering your agency in Washington state with the nursing board, and having to have a local office in Rhode Island.
You are organizing an S corporation. This is not a business license (nor do you need one). If you want to, you don't even have to do that, you can be a sole proprietor. Personally, I'm a C corp, never understood the S corp advantages. As far as I can tell, it is only the ability to pay yourself a "reasonable" salary and pay the rest in a K-1 which is not subject to FICA. To balance that, you can have profit sharing in a C corp that is not subject to FICA, all health care costs are deductible for yourself (not just insurance), and if you want to retain equity so you can meet payrolls, you can't do that in an S corp.
You need an EIN from the IRS. But there is no filing other than quarterly withholding taxes - easier to leave those details up to your payroll company