As large companies face uncertain conditions, some prefer to pay consultants operating their own shops over employees, even for high-level roles. The typical single-employee S corporation that uses Collective has annual revenue between $80,000 and $1 million and works in marketing, software engineering, design, law, medicine or consulting, Radfar said. More than 80,000 company owners across the country have applied to use the service, which costs $299 per month.
Radfar said Collective focuses on S corps because of their tax advantages over sole proprietorships. But setting up and managing the businesses can be a labor-intensive, distracting problem for tiny companies, he said.
“How do we help people focus on their passion, not their paperwork?” he said.
The company raised $20 million in 2021 in a funding round led by venture capitalist firm General Catalyst. The investor list includes several founders of firms that enable freelancers to make substantial profits, including Steve Chen of YouTube, Kevin Lin of Twitch, Sam Yam of Patreon and Hamish McKenzie of Substack. Sound Ventures, co-founded by actor Ashton Kutcher, took part as well.
Collective’s services include help with company formation and regular tasks such as payroll and taxes. Some of the services are automated on a dashboard, while others occur with the assistance of tax experts, accountants and bookkeepers.
Some Collective users told the company that they started their own business as a result of pandemic-related restrictions or layoffs, a trend that was reflected New York, in which the number of businesses was down by 1% from late 2019 to late 2021, according to a report by state Comptroller Thomas DiNapoli. In their stead, new businesses, most with fewer than five employees, proliferated. In 2020 81% of all American small businesses had no employees, according to the Small Business Administration.
Radfar said his company will be adding staff to deal with the influx of demand, especially from New York companies. All Collective employees are remote-first, so the new staff members will not necessarily be located in New York.
In addition to individual accountants and bookkeepers, there is some local competition at business back-end and tax-prep technology companies including Muse Tax, which uses artificial intelligence to look for missed deductions in personal and business tax filings.