Nontax considerations for a client planning to become self-employed.

• Author: Ellentuck, Albert B.

Facts: Hans Solo, an executive at Chewbacka, Inc., is contemplating creating his own business. Mr. Solo consults his tax adviser about the tax and nontax advantages of self-employment (SE). (For a discussion of the tax issues involved, see the Case Study in TTA, Nov. 1996, p. 703.) Issue: What are the nontax issues involved in becoming self-employed?

Analysis

Regardless of why clients consider becoming self-employed, there are several basic nontax issues they should take into account before and immediately after actually leaving their jobs. These are presented below in the form of a checklist that practitioners may want to use or adapt for clients who ask them for advice.

* Check for noncompete agreements: If the individual plans to continue in the same business as his present employer, he should make sure he has not signed anything that prevents him from dealing with the customers or clients he is counting on.

* Continue employee health insurance coverage: It often takes time to find private health insurance at an affordable price. Unless a spouse can provide coverage through her employment, the individual should continue his existing coverage under his former employer's group plan by making a Consolidated Omnibus Reconciliation Act of 1985 (COBRA) election within 60 days of the date his group coverage ceases. If the COBRA election is made within this period, coverage is extended retroactive to the date the coverage would otherwise lapse (and premiums must be paid for coverage back to that date). Generally, coverage is continued for 18 months at a cost of 102% of the cost to the former employer. The cost may come as a shock -- $500 to $700 per month for family coverage is not unusual -- but making the COBRA election at least assures the individual of continuing coverage and gives him time to look for private insurance. The individual should check with his employer's personnel or benefits department in advance to find out the COBRA cost so that this expense can be accurately budgeted.

* Make other insurance arrangements: Contact the individual's property and casualty insurance company and find out what needs to be done to insure any business property that he will have and to insure against liabilities that may be caused by any business activities. Have a detailed discussion with the client's insurance agent about such issues as whether the client will have employees or independent contractors who, for example, will make deliveries to...