When you realize that those side jobs are filling up more time and your freelance career has hit that tipping point, consider establishing it as an official company. Not only does converting your client base and workload into a compliant business fulfill tax obligations, but it also provides a formal framework from which to establish a reputable brand in your specialty area.
Knowing where to start in the conversion process can be difficult, especially if you have never run your own business before. Here are some tips to help you manage the process:
Covering the Legal Stuff
Make your freelance business legally compliant.
- Your state, county or city may require you to have a license or permit to operate your business.
- Create and register a business name, including a “Doing Business As” form, which is available at your city’s government offices, a library or a local newspaper office. If you decide to just use your own name, then you aren’t required to do this step. However, it’s good to think about a business name that you can build a brand name from versus your name, which doesn’t really let others know exactly what it is that you do.
- Determine if you want to go beyond operating as a sole proprietorship and register as a company or other type of corporation. There are many reasons why this may be worthwhile, especially when it comes to protecting your personal assets and establishing a different tax status. If you are not sure what is the best strategy, it is a good idea to meet with a CPA and discuss your options.
Ensuring you have the right permits and licenses is crucial.
Changing Your Tax Status
There are more tax actions to take once you establish your own business. While some of these tax documents may vary, depending on what structure you decide to take, these are some general actions you will need to take regardless of company structure:
- Pay estimated taxes, which may be a bit scary at first, considering you will have to take a significant portion of your quarterly earnings and hand them over to the IRS. However, if you think you may owe more than $1,000 on your taxes, you will be required to pre-pay these taxes.
- Fill out a W-9 for each new client you get in your freelance business. While they will only have to issue a 1099 if they pay you more than $600 in a year, it’s a good idea to have one filed in case you bill them more than that amount. Depending on your business structure, you will either fill in your Social Security Number (SSN) or your Tax ID for your company. If you are incorporated, you will not have to participate in this process, as there are different rules in this case.
Drawing Up Relevant Business Documents
Be sure to follow a formal process for every client you are seeking to get or retain. This standardized process will help ensure you have covered all aspects of the relationship to minimize any misunderstandings or issues that could arise later:
- Create a business proposal document that you can customize for each client that serves as a template for bidding on projects. This offers a professional way to let potential or existing clients know how you work.
- Provide a contract and non-disclosure agreement (NDA) so your clients will know you are completely transparent and trustworthy in your business dealings. This will help establish a level of trust from the beginning, as well as protect the information and activities shared during the course of working together.
- Generate a Statement of Work (SOW) for those clients that want to have a specific work plan for projects that include deliverables, key dates and costs. This also formalizes the working relationship to reassure the client of what you intend to do for them.
- Use an online invoicing system that offers professional templates and a standardized process for charging your clients for work completed, a monthly retainer or recurring charges. The ability to receive an email invoice that links to payment systems has been found to increase the probability of being paid early or on time, thereby enhancing your cash flow.
These are the basics of getting started on formalizing your freelance work into a professionally branded and managed company that can grow as your talent attracts more clients. You will then need to think about other types of legal, tax, business actions and a way to easily keep track of all your business performance including income, job time and expenses and invoicing. For now, though, check with an accountant on these recommendations before you take any action related to your particular freelance business to ensure you are making the best decision possible.