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“Sharing economy” business models such as Uber, Lyft and Airbnb are a result of several factors coming together to provide an in-demand service. Among these factors are a need for affordable and convenient accommodations, technological advancements (like geo-location enabled apps) and the entrepreneurial spirit of those who become service providers for these businesses.
Even as the existing businesses grow and new competitors emerge, uncertainty remains about the future of legislation, regulation and litigation for corporations that provide services exclusively through independent contractors. While consumers of these services don’t have much to worry about, the independent contractors carry considerable risk. Fortunately, there are ways for independent contractors to protect themselves.
Forming an LLC or S-Corp Can Help Protect Assets
As an independent contractor providing a service like transportation or lodging, you need to have a strong understanding of the risks and liability you face if something goes wrong. Hopefully, the company you’re representing provides comprehensive coverage that is communicated clearly to you. Even if this is the case, there may be situations that leave you on the hook.
One way to help protect yourself is to form a company and separate yourself from your assets. Without taking this step, you are operating a Sole Proprietorship and have no distinction between your business operations and your personal assets, like your home, vehicle and personal savings account.
Uber and Lyft drivers follow in the footsteps of Taxi drivers seeking asset protection. Airbnb hosts share concerns with asset protection for Real Estate investors. This strategy has benefitted many individuals with all sorts of personal assets they want to protect.
Forming a company and transferring your business assets to the company draws a distinction between yourself and your business. Should an unfortunate scenario arise and you are sued, it is much more difficult for the plaintiff to seek compensation from your personal assets. However, please note that business law varies state to state and there is no guarantee that your personal assets will be fully protected. Please consult an Attorney for more information.
A Delaware LLC or Corporation Provides the Most Privacy and Security
If you decide to form a company to protect your assets as an independent contractor, you’ll have to choose a state in which to do so. If you want to minimize up-front costs, you might stick to your home state, assuming that’s where you’ll be providing your services.
However, if you want maximum protection of your assets, you want to consider forming your company in Delaware. This does not require you to live in, visit or do business in Delaware. Rather, you simply form a Delaware business that operates elsewhere, and get the legal protection that Delaware offers. 66% of Fortune 500 companies choose Delaware and now you know why.
There are additional costs involved with forming a Delaware company and operating elsewhere. After forming a Delaware company, you are required to file Foreign Qualification in your home state. This allows you to do business with your Delaware Company and it requires an application fee and a Certificate of Good Standing (aka Certificate of Existence) or Certified Copy. You will be subject to an annual report fee, although specific requirements vary state to state. (Please note that “foreign” in this context refers to different state jurisdictions, not foreign countries.)
When forming a company in Delaware and filing as a foreign entity in another state, you are required to maintain a Registered Agent in Delaware and a Registered Agent in your home state. A Registered Agent is the liaison between you and the state. Harvard Business Services does provide Registered Agent service in both Delaware and all other states. For us to act as the Delaware Registered Agent, it is $50 per year per company. For us to act as the Registered Agent in any other state, the cost is $99 per year per company.
Whether you go with a Delaware company or file in your own state depends on your needs and priorities. If you are not sure, a conversation with an accounting or legal professional can help.
When you’re ready, Harvard Business Services can help with all steps in this process, from forming your business in Delaware or another state, to Registered Agent service and Foreign Qualification.
Which Business Type Should I Choose?
The LLC is the most popular type of company being formed. It is typically used for holding assets and is easier to maintain than a corporation. You can get more information here on the LLC vs. Corporation.
Protect Your Assets!
If you provide a service in an independent contractor (1099) capacity for one of the following companies, we encourage you to look into asset protection. The supplemental (or primary) income you earn with these services is surely beneficial to your financial health. It’s worth taking an extra step to ensure you won’t lose it all to one unforeseen circumstance.
Popular businesses using independent contractor services:
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE'S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.