Web3 Contractor Business Structure

All right. All right, gang. Uh, welcome one and all, uh, to another great installment of uh, DevNTell. So if you didn't know, uh, DevNTell is a 30-minute window for members of the development guild to showcase something they're passionate about or been working on. This could be, this could be an awesome project you've been working on, demonstrating unit tests, best practices, automation goodies, smart contracts, how to structure a project, etc. Basically, if you got a passion for something, this is your opportunity to share it with the community. And this week, I am happy to introduce MantisClone, or David, who is going to give us an overview of his Web3 contractor business structure and how he's documented his whole adventure through that. So, uh, David, off to you.

Sounds good. Um, I'm actually going to turn on my video for this. Uh, but hello everyone. Uh, I go by MantisClone in Web3 circles, but my real name is David. Um, I kind of dived into this whole Web3 space, uh, around the start of 2021. And, uh, I very quickly tried to get my bearings as, as a new Web3 developer. And, uh, over the course of the last year, I've spent a lot of time just kind of setting up my business operations to, to make it so that I could operate in this space and feel relatively safe, as far as one can be safe in this dark forest we're in. Um, I'll just start off by saying that I had originally structured this content as a blog post, and this presentation is all kind of a spur-of-the-moment thing for me. Um, so what I'm going to do is I'm going to have two different windows here, uh, that I'll kind of scroll through. This is the blog post that I've been working on. It's not published yet. Uh, so hopefully, hopefully that format works for everyone.

Um, I also want to jump right into the introduction and say that I am not a lawyer, I am not a financial professional, and none of this constitutes legal or financial advice. If you have those sorts of questions, or you're trying to do this sort of stuff for yourself, it is always good to check with a professional before making any concrete decisions. Um, so I'm going to start off with just a high-level summary of what I did. I'll start with what I did and then jump into a why later on. So what I did was, uh, I started an LLC for myself, a Wyoming LLC. And I chose that because I'm a resident of the United States. Um, so if you're trying to do all this stuff for yourself, some of this content might not fit if you live in other jurisdictions. Um, I contracted a registered agent service in Wyoming to form the entity for me, uh, establish a virtual business address, and they also offered to receive, scan, and forward all of my business mail. So that was an important key because I don't live in Wyoming. Um, shortly thereafter, I became an employee member of the Opolis Employment Commons, which is a cooperative that provides health benefits, payroll, and tax compliance services to independent workers. Um, in order to join Opolis, I had to elect for S-Corp taxation status with the IRS, uh, by submitting Form 2553. Um, an overview of what my business does: I'm a software developer, so I just write code for a living, and my business is just me. I'm the only person in it. Um, and I'm paid entirely in cryptocurrency, so that was a little bit of a challenge, um, because I pay all of my personal bills in fiat.

So, uh, basically what my business does is I send crypto in the form of payroll to the Opolis Commons twice a month. Uh, they make sure that all of the premiums for my benefits and my taxes are paid for me, and then they deposit the remaining funds into my personal bank account. So that's how the payroll routes through. Um, my LLC has a crypto wallet address that is separate and distinct from my personal crypto wallet addresses. Um, my LLC pays most of its bills in crypto if it can, uh, but for the cases where it has to pay taxes or it has to pay vendors that don't accept crypto directly, uh, what I've set up is a couple of different off-ramps for myself. I am currently waiting on a verification from Wyre to be able to off-ramp directly from Polygon. But usually, what I'll do is I'll off-ramp from Ethereum Mainnet using either Kraken or Gemini, which are centralized exchanges. Um, in all of those cases, the funds will then end up in my Relay business bank account, uh, and then from there I can just initiate ACH transfers or debit card transactions to pay for whatever expenses I have.

Um, I attempted to do my own bookkeeping for the first eight months or so, um, but eventually, it became clear that I just didn't have the time to do both my full-time work as a developer as well as, um, take care of all the accounting stuff. Uh, but I did set up my full accounting tech stack. So I'm using Xero as my general ledger, uh, I'm using a program called Cryptio to do all of my crypto accounting. Uh, whenever I send invoices, I use Request Network. Um, for storing all of my invoices and receipts and stuff, I was using Hubdoc for a long time and I very recently switched over to using Dokka. Um, I use Google Workspace for all of my domain name, my email, and my storage and stuff like that, and my website is hosted by Wix. Um, so eventually, I passed off all my bookkeeping to Fireside Bookkeeping, which is a firm out in Oregon led by Judah Koshky. And, uh, I contracted a CPA here in Columbus, Ohio. I live in Ohio, so I contracted a CPA there to handle my S-Corp elections, my business taxes, and my personal taxes for the year. And I contracted a lawyer to review the contract that I have with my client, the Ocean Protocol Foundation. So I know that was all very dense. That's just kind of, I wanted to front-load it because I know that people in the Web3 space have, you know, it seems like never enough time in the day to keep up with everything that's going on. So that's what I did.

Uh, I'll dive into a little bit more of why all that happened, and hopefully, I do want to leave enough time for questions at the end, so I'll keep it brief. I'll just start off that my journey into Web3 started off with KERNEL, Gitcoin KERNEL. If you haven't heard of it, it's a kind of a accelerator/incubator for Web3-related projects, and they also have an amazing open-source curriculum for just learning fundamental principles of decentralized networks and why what we're doing here is so potentially groundbreaking, potentially a paradigm-shifting. Um, so I learned a whole bunch while I was in my KERNEL adventure. I built a mental model of the Web3 space, and I just decided that I wanted to work for the Ocean Protocol Foundation, primarily because their values aligned with mine, their mission of allowing individuals to have privacy and control of their data was super important to me, and they were kind of in a growth state, so they weren't quite as early as some of the other startups that I was looking at, which kind of matched my personal risk tolerance.

Um, but when I was applying with them, uh, it became clear that they wouldn't be able to hire me because they are based in Europe, and they weren't open to having employees in my jurisdiction. Uh, so that left me with the idea of I would have to become a contractor and figure out how to manage my own business and my own finances and my own taxes, all that sort of stuff, and health benefits, too, was a really big one. Um, so I've already kind of told you what I did. I ended up creating my own LLC, I handle all my own benefits now. Um, but when I was first starting off, one of the big things that was hot in my mind was how do I limit my personal liability? You know, I have a family, I would never want my business actions to somehow cause us to lose our house or our car or something like that. Uh, so setting up an LLC to protect my personal assets was really, really important. Um, now that I have it set up, uh, it makes it super easy to participate in DAOs that don't necessarily have their own legal entities yet. Um, primarily because if something were to happen and someone brought a case against a DAO that doesn't have a legal entity, they would probably end up being treated as a general partnership, and then each of the members of that DAO would be jointly and severally liable for all damages that the wronged party is entitled to. So, uh, at least at the end of the day, I'll be able to keep my personal assets private.

Um, also on the topic of stability, I did get laid off at the start of 2021, and that really sucked. I had to switch over to COBRA health coverage, and that was a whole nightmare. Um, so it kind of showed me that W2 employment wasn't really any more stable than being a contractor. Uh, so now that I am a contractor, in fact, I feel even more stable now because I have the option to take on multiple clients and to mitigate the risk of my cash flow, basically. Um, exploring all of the stuff related to health benefits is what kind of led me to Opolis. So I mentioned it in the executive summary. Um, Opolis is the organization that I use to handle all of my benefits, my payroll, making sure that everything, all of the money from my business activities transfers over into my personal accounts in a tax-compliant sort of way.

Um, Opolis uh, will provide benefits packages. They have three different ones that you can choose from to adjust your preferences. And like I mentioned earlier, they pay all of the benefits premiums, the federal, state, and local taxes that I owe, and they send me a pay stub at the end of the year, or at the end of each pay period and then a W2 at the end of the year. So as a contractor, normally you would have to track your 1099 income and set up 1099s and have quarterly payments for taxes. I don't have to do any of that. All of the tax payments are handled directly by Opolis. I get a pay stub, I get a W2 like I normally used to. Uh, I do have to, for reasons I'll explain in a little bit, I had to turn my LLC into an S-Corp, so I do have to file an 1120-S at the end of the year, which is something I wouldn't normally have to do, but I think it kind of balances out. I think there's a net positive of the amount of IRS paperwork that I have to do. Um, some info about Opolis: they do charge a 1% fee for all of the payroll and benefits that I route through them. Um, but this is comparable to a traditional PEO, or a professional employment organization, of which there are several out there that, you know, they're cool and all, but I prefer Opolis for reasons I'll explain later. Or rather, I see it right now. As an employee member of the Opolis Commons, I'm actually a part-owner of it. So it's much more akin to like the decentralized ethos.

Um, I'm actually an owner of it as being a member of it, and, uh, anytime they turn a profit, my membership in that cooperative will entitle me to a portion of those profits, which I'm really excited about. It's kind of like REI. REI is another, if you're familiar, it's a store for outdoor gear. Uh, they're also set up as a cooperative. Um, when I first joined, I had to pay $20, but that was kind of a minor thing. And then they have a few discounts for people who are just setting up their business, for example, they have a Xero discount if you're going to try and do your accounting. Um, so here's the part about ownership that I want to talk about. With Opolis, I receive work rewards, a token that exists on Polygon. I receive work tokens that, um, in exchange for performing actions that benefit the Commons. Uh, so for example, anytime I route payroll or benefits through them, uh, I receive a portion of that back in work tokens. Um, additionally, if I refer people to become members of Opolis, I'll also receive work tokens for that. Um, but this is a really cool concept to me because, um, today the work token has a price, I could sell them if I wanted to, so there's kind of a monetary aspect to it there. Um, but it will also represent governance rights in the Opolis cooperative at a future date, in the very near future according to their work paper. I think we have currently like 250 members, uh, and when we get up to about 1,000 members, it will transfer over to a more work-community governance model than what they're doing right now.

Um, I kind of glossed over it. There's a bunch of different ways to earn work tokens, but just to be cognizant, I'll gloss over that for now. Um, okay, so getting into a little bit more of the meat about how I structured my business. One of the big things is how, when you have an S-Corp, um, you are actually an employee of your own S-Corp. That's the way that I'm doing it. So I'm an employee of my own S-Corp and I'm also co-employed by the Opolis Commons, and that's what allows me to get a W2 at the end of the year. But then that begs the question, how much do I pay myself in salary? Because it doesn't just go straight into my personal accounts, it goes through the business first. Um, and basically, the IRS has rules about this. You have to pay yourself a reasonable salary, and they define that as what other businesses pay for similar sorts of services. Um, so since I'm a Web3 developer, I kind of did some searching for what a typical salary for a senior developer in the area that I live, and I went through a few different sources. I found three crowdsourced and one employer-sourced salary estimators. Um, and then I stored those away for 2021 to justify my salary in case, hopefully, remote chance that I get audited. I'll have that to be able to prove that that's why my salary is what it is. Um, I'm leaving the rest of my funds, there is a surplus on top of what I'm paying myself that I'm keeping in the business currently as crypto. So I have crypto on my business balance sheet. Um, I'm just kind of waiting to see how much of that goes towards taxes. I haven't finished my 2021 taxes yet. Uh, so we'll see how much of that goes to taxes, and after that, if there's any left over, I'll take it as an owner's draw, meaning that I'll just send it directly from the business to my personal accounts, which is another thing that you could do to take money out of the business.

I just want to note that evading taxes by disguising your salary as a distribution or an owner's draw could get you penalties if you're not paying yourself a reasonable salary, so that's why that's so important. Um, oh, regarding entity domicile. I had mentioned earlier that I put my LLC in Wyoming. Uh, that was primarily because of the legal clarity surrounding owning crypto in Wyoming. Um, some people will tell you that Wyoming also has the lowest corporate rate tax, or one of the lowest corporate rate taxes in the United States. That was explicitly not a factor in my decision because I'm set up as an S-Corp, which is a pass-through entity, meaning that all of the tax obligations flow through the business to the owners of the business. So I don't live in Wyoming, so I would not be able to take advantage of the low corporate tax that exists there. Um, I guess I've kind of already covered this, why did I form an S-Corp? It was because I wanted to participate in Opolis, and in order to do that, you have to be either an S-Corp or a C-Corp, and since I was starting from scratch, creating an S-Corp was the easiest way to go. Um, I already kind of talked about the 1120-S that I have to file at the end of the year. Uh, there are some limitations to forming S-Corps. I'll just leave that up on the screen, I don't need to get into it.

Um, okay, so I'll cover the experience with filing Form 2553. Um, in case you're not aware, the IRS has been massively backlogged for this last year just because of all the stuff happening with COVID, I think. So putting paperwork through them is taking a long, long time. Uh, the Form 2553 normally takes, in a normal year, about three months. For me, it was about five months to do it. And unfortunately, I messed up my first submittal by using a digital signature instead of a handwritten one. And because of that, I had to resubmit. So it took a total of 10 months for me to finally get confirmation that my LLC was in fact being treated as an S-Corp. That's just in here as a warning to people to be careful when you're filing that paperwork. Um, accounting. So I kind of mentioned it at the beginning. I tried to do my own accounting, but eventually, I decided that, you know, doing crypto accounting is very complex today. The tools aren't as fully fleshed out as many other tools out there. So for doing transactions on side chains and L2s, it's a lot of manual CSV formatting and then importing into my accounting software. Uh, so all of that work I ended up passing off to Judah at Fireside Bookkeeping. He's been excellent so far. If you're looking for a great bookkeeper, I suggest you check him out.

Um, I'll talk a little bit about the crypto accounting software that I use. Uh, I mentioned that I use Xero and Cryptio, and that I'm also using Request. So all of those three tools actually integrate with each other pretty nicely. Uh, Xero is just a general ledger for accounting purposes, and Cryptio handles the crypto-specific stuff. Um, the way Cryptio works is I can just import all of my transactions directly from the blockchain and then turn those into journal entries in Xero so that I can treat them as bills or reconcile them against bank statements, and then it all turns out into a pretty like profit and loss chart at the end. Um, Request Network is really cool because all of my invoices are sent not on-chain but they're sent stored in IPFS. They're stored in IPFS. So, um, this means that this information is public and queryable, which allows other tools like Cryptio to be able to just look at all of my invoices and immediately label them and connect the invoice URL to the entries in my accounting software. So that's super nice, I love that a lot.

Hey, uh, David, this is super interesting. I don't want to break your flow, but I just want to give you a five-minute warning.

Ah, five minutes. Okay. Um, briefly, I have a business bank account. I ended up setting up with Relay, which is backed by Evolve Bank and Trust. Um, they're a bank that many other startup-style web banks will be backed by. So Mercury is backed by the same place, Genesis Block is by the same place. Uh, there's a few other crypto-friendly banks out there like Silvergate and Signature, but that's more for like really large sort of ventures, so that didn't quite make sense in my case. And then there's some future banks that haven't opened their doors yet, but there's Avanti Bank and Kraken Bank, both of them are going to be able to actually custody your crypto for you, so I'm keeping an eye on those.

Um, business exchange accounts, I kind of briefly touched on the fact that I'm using Wyre, Kraken, and Gemini. Uh, just a heads-up that getting those things set up requires a lot of KYC/AML. Uh, but once you have it set up, that's how I pay all of my bills. Uh, self-custody and formation costs. Uh, when I was forming my entity, I made sure at the end to reimburse myself for all of the costs that I made with personal funds. And that's important for just creating a corporate veil between my business and my personal assets. Uh, and then self-custody, I think is also very important. I use a Ledger device to store all of my business funds so that way I don't have to rely on any banks or anything to make sure that my funds are safe. Um, and wrapping up, there's a referral disclaimer. I mentioned it already but if anybody chooses to join Opolis, please mention me as your referrer, because then I can get some work tokens out of it. And then I also have a link in here for the Request Network if anybody wants to use that for their invoicing solution. I have a referral link. And the three professionals that I contract with are also super great. If you want to check them out, please do so. All right. Uh, it was kind of rushed at the end there, but if there's any questions, I'd be happy to take them.

Is this article available publicly?

I have not published it publicly yet. This is still in a draft state. Sweet. Cool. But as you can see, it's pretty polished. I'm just working on tone, just trying to make it more upbeat.

Yeah, this was fantastic. This is very thorough and, uh, yes, there's a lot of details there that even I wasn't aware of. So this is very eye-opening. Thank you for sharing this.

Yeah, no problem.

I have a question. So when you're working with clients, is there anything they have to do on their side to interact with you as a business or you just, you know, you just tell them where to send the money and that's as much as what they have to do on their side?

Well, um, currently I only have one client and I'm working with them for a long time. Um, with them, I have a contract drawn up, like a business-to-business contract. Uh, my LLC is what is mentioned as one of the parties on the contract, and then their entity is what is on the other side. Um, yeah, basically. Any other questions?

Hi, I just had a quick question. So I came in a few minutes late, but, um, but yeah, taxes seems like a really important topic for sure. Did you use certain software for that or I might have missed that part?

Sure, yeah. So yes, being able to figure out crypto taxes is a fair bit more complicated than traditional taxes, but the tooling is getting better. Uh, I use Cryptio for my crypto accounting, and it's able to output a form, I want to say I forgot the number, Form 8949. So Form 8949 is going to be your capital gains and losses, and that would be a critical piece to be able to file your taxes.

Does that tool let you, um, track all the changes or just when you sell? Does it help you sort of manage your crypto as well or just you use it to enter to get that form?

Uh, it does have some limited data display capabilities today. I think there's other tools out there that are better for portfolio management. But Cryptio today, what it does is it allows you to label each of your different transactions and then you can match those labels up to a chart of accounts in Xero so that when you link them when you transport them to Xero, you can get a balance sheet, a traditional balance sheet for a business, like a profit and loss chart, a balance sheet, and all that other sort of traditional accounting reports.

Okay, yeah. Thank you very much. Thanks for your presentation. I'd love to go through this in more detail, a lot of things here.

Sure.

All right, uh, so we are at time. Um, so we'll just end the recording and DevNTell here. However, you are all free to stay behind and ask MantisClone any further questions if he's willing to stay on. Uh, but yes, thank you once again, MantisClone, David. Uh, this was very awesome presentation, and thank you so much for volunteering last minute. It turned out really great, so I'm happy we were able to do this. So, um, again, this concludes DevNTell for this week. Please join us next week where Hansie will be showing us his project called Web3VOD. All right. All right gang, all the best, and we will catch you next week. All right. Bye.