Amy Rigby“Starting a freelance business” is a term loaded with all sorts of misconceptions. In the old days, it meant purchasing or renting a physical building, buying inventory, hiring and training employees, getting all the proper licenses, etc.
These days, I promise you, it is NOT that complicated. Thanks to the Internet, starting a freelance business is simpler than ever.
There are many different business structures, such as sole proprietorship, LLC, S corporation, and partnerships.
For the purposes of this blog post, and since you’re just starting out, I will focus on the simplest and cheapest of them all: the Sole Proprietorship.
To be a sole proprietor, you don’t have to do anything to formalize it. Seriously, there’s no paperwork you have to file to become a sole proprietor. You also don’t have employees.
What happens come April 15th is you will file your regular personal income tax return, with one addendum: the Schedule C. The Schedule C tells the IRS all the income you made from your business, as well as any losses (expenses), to arrive at your taxable income. So basically, as a sole proprietor, you are the business.
*Disclosure: I am not a lawyer nor an accountant, so this blog post should NOT substitute seeking professional advice from a lawyer or accountant.
Step 1: Establish a business address.
Even if you plan to work completely remotely and travel full-time, you must have an address for your business license, tax payments, and more. If you plan to work from home, then yes, you can use your home address for your freelance business, but I wouldn’t recommend it. When you start a freelance business, a lot of your business information (such as its name and address) becomes public record. That means your home address could become available to the public, and for privacy reasons, you may not want that.
I recommend renting a UPS Store mailbox or using the service Traveling Mailbox. Alternatively, you can pay for a membership at a coworking space; often, these spaces will give you a mailing address you can use.
Many digital nomads just use their parents’ homes as their residences for business, tax, and mail purposes. If you have parents that’ll let you do this, this is a great option! You can also ask a good friend.
Of course, you could always rent your own office if you’d like, especially if you plan to be working in-person with many clients. But to keep costs low when you start out, avoid running out and getting an office immediately!
Step 2: Register your business in your city, county, state, and/or country.
Laws vary by location, but almost any place you live will require you to register your business with the local government. Again, it’s not as hard as it sounds, especially as a sole proprietor and freelancer. You usually fill out one page that states your name, business address, mailing address, what your business will sell, and the name of your business.
Easiest way? Visit your City Hall or Chamber of Commerce and ask them what kinds of paperwork you’ll need to fill out to register your freelance business. They’re the experts and will be able to point you in the right direction.
Step 3 (Optional): Get an EIN (it’s free).
This step is optional, but I highly recommend it. This adds an extra layer of privacy for when you have to fill out W9 (Independent Contractor) forms. Basically, when a client has you fill out a W9, instead of putting your Social Security Number, you can put your EIN.
You can apply for an EIN (for free!) on the IRS website here
Step 4 (Optional): Register a Fictitious Business Name (FBN) or Doing Business As (DBA).
For the purposes of this blog post, you don’t need to worry about this right now. As a sole proprietor, you are totally fine operating under your first and last name. Later, you can register an FBN or DBA if you’d like. You can still remain a sole proprietor even if you have a FBN/DBA.
Here’s how to do that: Again, check with your Chamber of Commerce or City Hall. For me, I had to first purchase an announcement in my county’s newspaper announcing that I would be doing business under a name other than my own (this step was strange to me, but it is required in most places). I had to call various local papers to see how much it would cost to purchase an FBN announcement in their paper. It ended up costing about $40.
After that announcement was published in the newspaper, I filled out a paper with my county to register my Fictitious Business Name.
“Do I need to make myself an LLC?”
As a freelancer, the simplest structure and the one I recommend when you’re just starting out is Sole Proprietor. You don’t need to fill out any paperwork or do anything extra.
The biggest draw for many freelancers to the LLC structure is the extra protection because an LLC separates your personal assets from your business assets. That means, for example, if a client were to sue you, they probably can only sue your business (the LLC) and not you personally; therefore, your personal assets such as your bank account, house, car, etc., would be protected from the lawsuit. However, this doesn’t work in all cases; it depends on the lawsuit.
You can always start as a sole proprietor and later change to an LLC.
Step 5: From here on out, record EVERY PENNY you spend on your business and EVERY PENNY you earn from it.
This is essential in order to do your taxes each year because now that you’re a sole proprietor, you’ll have to send the IRS a Schedule C, detailing your revenue and expenses. The IRS needs to see how much you profited (revenue minus expenses) from your business because that’s the amount they’ll have you pay taxes on.
Get a separate bank account for your freelance business and ONLY use it to receive income for your business and buy things for your business.
Use accounting software to do your bookkeeping. I recommend Wave because it’s user-friendly and FREE.
BONUS (Optional): Contact an accountant for a consulting session to get everything set up legitimately.
An accountant is the one who can help you set up an LLC (if you want to go that route), sort out business registration in your local area, help you set up bookkeeping systems to track your income and expenses, and advise you on how to pay your quarterly taxes.
I recommend contacting several accountants before deciding who to work with. Here are a few questions to ask to make sure they’ll be a good fit for your freelance business:
- Do you work with freelancers often? Sole proprietors or LLCs?
- Do you operate totally online, or will I need to give you paperwork in person?
- What’s your style of working?
- Are you more conservative or liberal in your interpretation of tax law?
- Do you do bookkeeping throughout the year for your clients, or do you only do tax returns at tax time?
- Do you outsource any of your work, or would I be working directly with you?
- What are your rates?
Step 6: Always have a contract/agreement in place before you begin work.
Lots of freelancers panic about this, but the contract does NOT need to be anything fancy. Let’s remind ourselves what a contract does: It clearly outlines in writing what you (the freelancer) has agreed upon with the client. This is essential to avoiding any misunderstanding. If any disputes come up, you can refer to the signed contract. If, for example, you decided to work WITHOUT a contract and had only a verbal agreement, and the client is saying he promised to pay you $1,000, but you are saying he promised to pay you $1,500—who’s to say who’s right? To avoid this dilemma, have a contract in place.
To get a FREE freelance contract, check out this awesome Contract Creator tool from Freelancers Union.
How to Start a Freelance Business: Recap!
So to recap what we just went over, starting a freelance business involves:
- Establishing a business address.
- Registering your business at the city, county, state, and/or federal level
- Getting an EIN (optional but recommended)
- Registering your Fictitious Business Name or Doing Business As (optional)
- Keeping careful records of income and expenses
- Having a contract in place
*Disclosure: I am not a lawyer nor an accountant, so this blog post should NOT substitute seeking professional advice from a lawyer or accountant.
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