Being in the freelance business offers a lot of freedom for your work to be scheduled around other commitments such as family, recreation and other hobbies or travel.
But the downside is that working freelance leaves you totally personally liable for any legal action taken against you for your work. You are also personally responsible for all business debt. The only way to remove yourself from this personal liability is to create a business entity.
There are several types of entities that you can choose from, so it is best to do some research to learn what each type of entity has to offer and how it can benefit you. These few tips can help you to make the best choices for your business future.
Registrations to Protect Your Business
Before you can select your business structure you will need to select the name of the company. While you are considering your options, be sure to think about all of the documentation that will have your name on it as well as your logo.
This includes considering how it might look on a website and viewed on a computer or mobile device. Once you have determined the name, check the US Patent and Trademark website to be certain that the name is not already trademarked.
Then visit your state website to determine where you need to register your name within your state. While at the state website you should also research any type of business licenses that are required to operate a business in the state. If you are unable to locate that information, you might want to check with the Small Business Administration for assistance. They can provide a great deal of information to new business owners.
Is a Partner a Good Idea?
Working freelance does not always mean that you work alone. In many cases there are others whom you collaborate with. And in the past you just found a fair way to split the payments that you received for your work. But now that you are creating a legal business, how will that affect your relationship and ability to work with those other people? One option is to create a partnership.
Both the LLC and S Corporation can be owned by multiple people. But if this is the case, then you will all need to agree on roles, responsibilities and percentages of ownership. It is also important to remember that some legal entities must be dissolved when one owner decides to leave, so that could have a big impact on the long term future of the business. Planning and documenting all of the agreed upon information as you create the business partnership can avoid many unfortunate and uncomfortable situations in later years.
LLC vs. S Corporation
The two most common business entities are the Limited Liability Company (LLC) and the S corporation (S corp). An LLC provides the business owner a layer of insulation from the financial responsibility of the business. A business owner can raise money without taking personal responsibility for the business debt and the business can easily be sold or transferred to another owner. This personal financial separation is certainly a benefit but the drawback is that the LLC owner must pay self-employment tax.
The S corp have many more tax guidelines and are more complicated on that front but it is a means of avoiding payment of both personal and corporate taxes. This is because the owners are paid a salary and they get dividends from any remaining profits that the business earns. Both of these types of business entities provide the protection from financial liability for the owner or owners but the tax side becomes complicated enough that you will want to consult a tax accountant and attorney to determine which one is the best choice for your freelance business.
Long Term Guidance
Owning and running a freelance business can be very time consuming. Even if the workload is shared by partners, the owners are responsible for delivering a product to your customers. So learning tax laws and accounting best practices would most likely be the last task that you have time to complete.
So it is critical that you surround yourself with trained professionals who can offer you support in a few key areas. Having a tax accountant who can offer you tips during the year and answer question will help you to avoid that frantic time each year when you struggle to locate information and documents to complete tax filings. And no freelancer ever wants to think about something going wrong, but it can happen to even the most conscientious people.
It’s important to have an existing relationship with a legal professional before you need one. You don’t want to be interviewing lawyers to find a good fit when you already have a problem. That added stress will only distract you more than ever from the work that you need to complete.
A final professional that might be of great assistance to your new freelance business is an insurance representative. Many firms that you do work for might require some type of business insurance to contract with you.
Having an existing relationship can make getting a needed form of insurance as simple as making a phone call or as simple as getting a title loan with no inspection. This can be important when you are signing a new contract or waiting to get paid.
Plan Your Future to Be Successful
Deciding to create a formal freelance business is a big step and one that requires a lot of planning. But the time that you invest in determining the type of business entity that you want, the tax structure that you want to follow and who you want to be working with long term will reward you with a very successful freelance business.
Using these few tips to learn about business structure and some of the required registrations and licenses needed for your business will help you to build a solid foundation for your business and your financial future.