Editor’s note: The opinions expressed in this commentary are the author’s alone. Chris Brown is the founder of Venture Legal where he represents startups, freelancers, and small businesses. This column — originally published by Venture Legal and part of a limited series on freelance entrepreneurism — is intended to be general in detail and does not constitute legal advice.
A record 57 million Americans freelanced last year, according to Freelancers Union. In fact, freelancers will make up more than half of the American workforce within the next seven years. Moreover, the current economic crisis is likely to accelerate that growth.
Freelancing offers many benefits, including greater flexibility and the ability to increase your income. And on a personal note, I can say that after six years of being a freelance lawyer, it was the best career move I’ve ever made. Regardless if you are already freelancing, or are just starting out, this three-part series of articles can help you.
In this first article, we’ll focus on how to start a freelance business entity and set up your financial accounts. In the coming weeks, we will cover how to create your brand and market your services; how to manage client agreements; and how to improve your services over time and utilize subcontractors. We’ll also highlight popular freelance tools you may find helpful.
Starting your freelance business
There are many different legal entities you could choose to run your business. But for most people, you’ll want to form an LLC. You can do this in most states on your state’s Secretary of State website. After creating your LLC, it is important to create an Operating Agreement to govern the company’s operations. Although it’s best to hire a lawyer to set this all up for you, it is possible to do it yourself or to pay an online service to do it for you.
By its nature, a freelance business has just one owner. And for that reason, your governing documents don’t have to be too complicated. However, if you decide to create an LLC with co-owners, it’s a very good idea to talk to an attorney first.
Bonus tip: When forming your LLC, you have to select a business name. Most states will allow you to register almost any name unless someone else has already registered an identical name. But that doesn’t mean the name is not protected under trademark law. It’s a smart idea to search the uspto.gov trademark records before selecting your name (and also running a “common law” search, which means searching places like Google and Facebook).
Get an EIN
With your LLC formed, you can apply for an EIN. This is simply a number the IRS (and others) will use to identify your business. You can obtain an EIN online at irs.gov. Like starting your LLC, you can do this on your own. However, many freelancers find it easier to hire an attorney or accountant to set this up.
Opening your bank account
With your LLC documents and your EIN, you can open a business checking account. This is an important step and you should not ignore it. Do not simply operate under your own, personal checking account. You should always create a business checking account to manage your LLC’s money.
If you take the documents above to your bank, they can usually set up your account in fewer than 30 minutes. Once you create this account, deposit enough money into the account to cover your initial startup expenses (or more if you can). Then, make sure you use this account whenever possible when you make purchases for your company. And obviously, when clients pay you, put the money in this account.
Keeping your finances in order
It’s important to reconcile your financial accounts at least once a month (if not weekly), according to Dan Schmidt, founder of EBCFO. The best way to do this is to use a cloud-based accounting tool like Xero, QBO, or FreshBooks, he said. You can sync these services to your bank account online and pull in your transactions to keep everything organized. And at the end of the year, you can simply print a profit and loss statement (or give your accountant access to your account) to file your taxes.
You can also use one of those platforms to invoice clients and accept payments online. Although there are additional fees, it is often best to let your clients pay quickly rather than spending time chasing down paper checks.
Most freelancers who operate under an LLC will be taxed as a sole proprietor. What this means is that your profit or loss will be reported on your personal tax filings each year. Your goal should be to save about 20 percent to 30 percent of your profit on an ongoing basis. You can then use that money to pay quarterly taxes throughout the year. And at the end of the year, you may owe a bit more, or you may be entitled to a refund.
Although this can be very complicated, the key is to track your income and your expenses, and to make sure you allocate some of your profits for taxes. As long as you’ve properly saved, the rest isn’t too hard.
The best way to ensure you do this correctly is to meet with an accountant when you start your business and they can give you more specific advice.
In the next column in this series, we’ll cover how to create your brand and market your services. We’ll also provide a quick introduction to freelance client agreements.
Chris Brown is the founder of Venture Legal where he represents startups, freelancers, and small businesses. He also co-founded Contract Canvas, a digital contract platform for freelancers. www.venturelegalkc.com // @CSBCounsel