The allure of being your own boss is a strong pull for many to escape the traditional demands of a regular job. Recently, app-oriented companies (such as Uber, Washio, Postmates, Shyp, and others) have become popular ways for non-capitalized erstwhile entrepreneurs to enter the wide world of self-employment.
Becoming an independent contractor brings many benefits, including flexible hours, flexible working conditions, possibilities of setting one’s own fees, and deductibility of business and home office expenses, essentially “from dollar one.”
On the flip side (because every silver lining has a cloud, of course), there are additional responsibilities for independents: more stringent record keeping, close budgeting, insurance – health, property, liability, and disability – at least, liability concerns, and capital expenditures, to name but a few.
Traditionally, starting one’s own business (or “striking out on one’s own”) has involved careful planning, perhaps rounding up some initial capital (seed money), and – even if not set in print – developing at least some semblance of a business plan as to how the new venture should operate and accomplish its goals, usually first and foremost, generating income for the entrepreneur.
Franchising has helped take some of the free-form aspects out of entrepreneurship by providing a cookie-cutter model, generally stated startup costs, and often-well-estimated projections of earnings, taking a good portion of the guesswork and supposition out of the equation. The initial trade-off here, of course, is the cost of the franchise (franchising fees) over and above any perceived value of the name brand itself.
In this new era of app-based companies looking to amass a 24-hour, on-demand, flexible workforce, the appeal to those wishing to break out of either traditional model (as an employee or as one starting a new venture, either from the ground up or via franchising) is clear: with essentially no money, one may submit an application, and with such low risk to the app-based enterprise, be reasonably assured of starting down the path to financial (and other) independence in a matter of hours or days.
The problem is that it is necessary to consider the great risks being accepted by the newly-independent contractor in these situations. Driving for a company such as Uber, for example, means additional wear and tear on one’s formerly personal vehicle, giving rise to increased maintenance and repair costs. Insurance, originally stated for “personal use,” is no longer so clear cut, possibly exposing the driver to additional liability (or the need for additional liability insurance).
To increase gross revenues by making one’s vehicle more attractive to would-be passengers (customers, or fares), many drivers upgrade to cars they could not otherwise afford, anticipating additional income from the revenue stream of the driving-for-hire business singulair medicine. So what happens should something interrupt that income stream, such as an illness or even termination? Now, the driver is possibly left with unsustainable debt for a vehicle which is no longer needed or wanted, with no easy way out. Surely, this happens to other small businesses, as well. The difference is that usually there is some additional capitalization behind such purchases and there is more than one revenue stream contributing to the (added) debt service each month.
Perhaps the area in which the driver is working considers such services in line with taxi and limousine services, requiring additional registration, reporting, and fees. As he or she is acting as an independent contractor, the app-based company may be reticent to step in to mitigate this additional overhead.
Our opinion in these matters is not that the app-based model is a bad idea, nor are we expressing a professional opinion as to whether drivers (in the illustration provided, above) are indeed independent contractors or statutory employees (many factors go into making these determinations, and it is best to seek guidance from your tax professional before blindly accepting what the person or entity on the other side of the table asserts to be the case). We are saying that there are more factors to consider than just how quickly one may start raking in the cash with how small an investment in sweat equity and/or capital.
As always, we are available to discuss options and situations with all of our clients, anywhere in the US. Feel free to contact us today.