(720) 254-1546
vintagedigital [at] dogstar [dot] org
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Setting Up a Software CO-OP

The Idea

A number of months back, a group of us had the idea to create a software co-operative. There were several tenets that we decided to follow:

  • The company wouldn't have any employees -- everybody involved would be have 1099 status and would be an independent contractor
  • The company would be formed as an Limited Liability Company - we chose the state of Delaware
  • The company would seek to have a $0 cash and asset value at the end of each year
  • The company would be virtual to keep costs low
  • We would focus on working with open sourced projects like Drupal

The Setup

We set the company up using Instacorp. The benefit was the speed at which we could set up the company with an automatic legal presence in Delaware. The people at Instacorp made the process incredibly simple, asking a few questions. Within days the legal documents were delivered. That, in itself, really didn't make the company real.

After receiving the legal documents, it was necessary to obtain an FEIN for tax purposes. This is a simple process on the IRS site - it just takes a few minutes and you get the documentation electronically.

We needed to decide how to be taxed.
LLC's report taxes in one of 3 ways:

  • Disregarded entity (limited to one member LLC's)
  • Partnership (default if other elections are not made)
  • Corporation, electing to be taxes as pass-through entity, called S corporations.

In the case of Vintage Digital, workers are paid for what they do which is reported to them on FORM 1099 as commissions.
Great variation will occur in compensation since it is entirely based on hours worked and percentages for those who find clients and shepherd clients through the contracting process. The LLC is a virtual corporation, with exceeding low or non-existent overhead. There is no intent to use the LLC other than as a distribution method for sharing work; profits/losses will be kept to a minimum. There is no intent to hold fixed assets or incur debt.

In the final analysis both partnership and S-corporation reporting would be the same.

Our accountant indicated that the following things were recommended:

  • Use "S" corporation for tax reporting because the laws are better understood and simpler.
  • Majority of LLC's elect to report taxes as a pass-through corporations, hence even the IRS is more familiar with these tax laws.

We had an S-corp election to indicate how we were going to be taxed - after the election that document needs to be sent to the IRS.

We needed a bank account and opted for a bank that had free business checking and had online bill pay. The bank required our Articles and two forms of identification. We also needed a copy of our FEIN letter from the IRS.

The Tools
All companies need tools to help run things on a day to day basis. A virtual venture is no different. We needed management tools, communication tools, invoicing/book keeping software, and ways to manage contracts. To that end we sought out different solutions that would provide us with ways to sensibly manage ourselves and our projects.

  • Skype for Communication (both voice and chat)
  • Open Atrium for a client intranet and as an internal planning tool.
  • Bamboo Invoice for invoicing clients (although that might change as we transition to QuickBooks)
  • Drupal for our Web presence
  • dotProject for time record keeping and ticketing
  • Office for estimates, calculating commission shares, and contracts
  • Google Voice for incoming phone calls - the rest of us use our own mobiles

The Team

The team is comprised of:

All of us have (and continue to) contribute to the Drupal Project and are heavily involved in our local communities.

The team keeps in pretty much constant contact through Skype. We try to meet about once a month together to have Member/Board meetings. They have occurred in restaurants for brunch, member's homes, and also at a bowling alley - pretty much anywhere that is quiet and you can get through company issues. Fortunately for our crew, we all live with 30 miles or so of one another which makes getting together fairly easy.

Each project gets its own Skype room, project in Open Atrium, project in dotProject, and commission spreadsheet.

As clients come in, we assess who has bandwidth for a given project - the goal ensuring that each co-op member has enough work (in and outside of the co-op) to make a reasonable living. Co-op members are free to work as much or as little as they want (given the work is available). This arrangement was designed to give our team as much flexibility as possible.

Comments

Thank you!

I'm working on starting a digital marketing co-op and have been searching everywhere for guidance. Your summary is the clearest step-by-step process I've found. Really appreciate the info and wish you the best of luck in your new co-op!