Like most freelancers or self-employed professionals, you probably don’t question the legality of your business immediately following your morning coffee. With only so few working hours in a day, you’re wisely spending your time forming relationships with clients and meeting deadlines. There comes a point in time during the life of your business (usually tax time), when you must confront the answers to legal questions. Whether you’ve just started on your path to business success or you’ve been on the journey for some time, it’s important to sort out your answers to the following essential questions about becoming a freelancer and starting a business.
1. What is my business structure? Am I an individual or a business?
While this sounds like an easy question, a legal distinction is necessary. It is best rephrased as “Do I own a business or do I operate (on a legal basis) on projects as a freelancer?” This also trickles down into questions about everyday activities:
- Do I want there to be any separation between my personal life (bank account, savings, credit, etc.) and the business?
- Do I like the simplicity of keeping everything together as one?
In the United States, these questions will tell you what your business structure is.
As a sole proprietor the following conditions apply:
- You won’t be able to get any kind of business line of credit.
- If you’re ever sued or have trouble paying bills for your business, you are personally on the hook.
When you have an official business structure (such as an LLC or a corporation), there’s a legal separation between you and the business.
- Your business now exists as its own entity.
- The business builds its own credit, get its own bank account, and the business will be sued, not you as an individual.
If you are worried about protecting your personal assets in the event of a legal entanglement or getting business loan for your business, then forming an LLC or corporation is a sensible move.
2. Should I use my personal name or business name?
When you choose to freelance under your own name or create a business name, you choose how you want to be perceived by clients and the marketplace. Sticking with your own name might be fine if you plan on being a one-man/one-woman show for your entire career. If you anticipate bringing others on-board (whether as employees or subcontractors), then you’ll want to create a separate brand for your business.
If you incorporated or formed an LLC for your business, then you were required to create a business name.
3. How do I track my income and expenses?
Here’s the bottom line: No matter what your business structure is, you must have a firm grip on your financials to run your business successfully. Income and expenses should be kept for tax purposes and so you can keep track of how much money your business has at all times.
4. Contractor or employee?
With more and more businesses of all sizes using contractors and freelancers these days, it’s important to understand the legal distinction between contractor and full-time employee. This is true whether you are the one being hired or doing the hiring.
According to the IRS, whether you are an independent contractor (AKA: self-employed individual) or a full-time employee comes down to independence and control. Contractors have the freedom to determine how a certain job should be done. The IRS gives the following guidelines to determine if you are self-employed:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
You can find the answers to these questions by asking yourself the following questions:
- Who decides when and where to do the work?
- Who defines how the work should be done or the sequence of the steps?
5. What if a client is unhappy with the quality of work or finished product?
Self-employment involves some responsibilities that clients will hold you liable for, like satisfying performance expectations and deliverables.
In the event that a client is not satisfied with the work, you should have a few procedures established beforehand. Your contract or work agreement should set the expectations for the work to be performed (including the number of allowable revisions, if applicable). Keep a paper/email trail that documents your client correspondences. Be sure to document any delays on the client side that will impact the overall schedule