Starting a full-time freelance or consulting business can be daunting. The good news is that a lot of the administrative work can be done gradually as the business grows.
Starting a business can be intimidating, especially when you’ve spent the majority of your professional career working for other people. Even if you’ve been doing some freelance work on the side over the years, jumping in full-time can be daunting. There is seemingly so much administrative overhead to manage while also pitching clients and actually doing the work! It can be a lot to juggle.
The good news is that a lot of the administrative work can be done gradually as the business grows. You don’t need perfect corporate infrastructure in place from Day 1 in order to be successful. That said, there are a number of considerations and administrative tasks that are good to focus on as you establish your full-time freelancing business. Below is our list of key things to think about as you begin your freelancing journey.
You should make sure your new business doesn’t conflict with any prior commitments you made. This most often comes up when moving from regular W-2 employment with a company to freelancing. In particular, you will want to make sure you understand the non-competition, non-solicitation, and intellectual property (“IP”) ownership provisions in your employment documents. At a high level, a non-competition provision usually restricts the employee from engaging in a business that competes with the company; a non-solicitation provision usually restricts the employee from soliciting employees or clients away from the company or disrupting the company’s business; and IP ownership provisions deal with whether the employee or the company owns the work created by the employee during their employment. If you signed employment documents that contain these provisions, you’ll need to make sure you don’t do anything that would violate these obligations, like hiring your colleagues to work for you, taking clients away from your former employer, or using any company-owned intellectual property.
Agreements can come up in many different contexts, so make sure to think about all of the agreements you entered into prior to starting your new business. For example, maybe you did some consulting work on the side a few years back while you were employed full-time and you want to reuse the work product you created for that client. You should review the old consulting agreement you had with that client to understand who owns the rights to the work product and whether you have the ability to use it as part of your new full-time freelancing business.
Business entities are legal structures used by business owners to take advantage of certain benefits, including protection from liability and tax benefits. Someone can start a business without forming a business entity, but it’s generally a good idea to form a business entity first, so the business and its owners, employees, directors, etc. are protected and the business owner can take advantage of all available benefits from the start.
The main types of business entities in the U.S. are sole proprietorship, limited liability company (“LLC”), partnership, corporation, and nonprofit corporation. If you run your business as a sole proprietorship, from a legal perspective, there is no distinction between you and your business. You are the sole proprietor and you are essentially functioning as a business. If someone wants to sue your business, they will be able to sue you individually and go after your personal assets. However, if you form a business entity that provides for limited liability (like an LLC), you effectively shield your personal assets, activities, and interests from liability in the majority of situations. Setting up an LLC creates two distinct components: (1) the business which operates as an LLC, and (2) you as an individual. If someone wants to sue your business, in most cases, they won’t be able to sue you individually.
Once you have decided on which business entity to form, you will need to file business formation documents with the appropriate state or territory office. Many business owners choose to file their business formation documents in states like Delaware, Wyoming, or New York because these states have well-settled and favorable business laws that make it easier to resolve disputes and they have very easy online filing processes. However, you are required to register your business in any states or territories where you are engaging in business activities, so if you don’t operate your business in the state in which you filed your business formation documents, you will likely be required to register to do business in the state in which you are operating the business.
There is no single definition of what is considered “engaging in business activities.” Some activities that are considered to be business activities which require registration in the state or territory are:
Once the corporate entity is set up, and in order to maintain liability protection, it is important to set up an internal corporate structure that will keep the business separate from your personal assets, activities, and interests. If the business entity is determined to be an “alter ego” of the individual business owner, meaning that there is no distinction between the business owner (operating individually) and the business, the business owner might lose the liability protection of the business (this concept is called “piercing the corporate veil” of the business to hold the business owner individually liable for a legal claim).
Many courts look at whether the company has a separate bank account, whether the assets of the company are treated separately from the assets of the business owners, and whether the business owners observe all corporate formalities (i.e., that they file the business taxes and required registration documents, record financials and activities in separate records, etc.). If these characteristics are present, it is more likely that the business owners would be shielded from personal liability (assuming that there is no other reason to pierce the corporate veil and disregard the business entity). Maintaining separate bank accounts for your personal use and your business can also help you stay organized as your business ramps up.
You don’t need many contract templates when you’re just starting out. It’s good to have a basic proposal template you can use that explains the services you’ll provide for the client, your rates, and any other relevant details of the engagement. If you can set up a simple services contract, that would also be useful. Many new freelancers don’t operate with a services contract, or they use a proposal or invoice as a contract, but that can leave you with a lot of liability exposure and no recourse if things go wrong. A simple contract that sets out the terms of the engagement, fees and payment, services to be provided, and basic legal terms can be quite valuable. An invoice template is nice, but early on you may not need it if you are only working with a few clients. If you do want to send out invoices, many online tools automate this process and you can even make your own simple invoices that will do the trick. Build basic versions of these documents and scale up over time as your business grows.
In the U.S., and in many countries around the world, “intellectual property” refers to three categories of intangible work: (1) trademark; (2) copyright; and (3) patent.
Many new business owners believe they need to file a trademark application right away to protect the name of their business, product, or service. While it’s good practice to trademark the name of the business, product, or service, and potential investors usually like to see that the business owns intellectual property assets, in most cases, it’s something that can be done down the road when the business starts to grow. For most businesses, the likelihood that someone will try to steal their business name is very low. There’s no customer loyalty associated with the name yet, and in some cases, the business will end up changing its name as it tests its product and engages the market. Business owners are often better off waiting until the business has some traction and stability before filing the trademark registration. The time and money can be better spent on building the product and managing the business. That said, certain businesses operate in very competitive environments, and if there is a high risk that a competitor will steal the name of a business, product, or service, then it definitely makes sense to register the name early on as a protective measure.
Unlike filing for a trademark or patent registration, filing a copyright registration in the U.S. is cheap and easy. However, while registering the copyright to a work can provide certain benefits to the owner, copyright registrations are not necessary to own and protect a work. In the U.S., copyright ownership kicks in automatically once the work is put in a tangible form (once the photo is taken, once the lyrics to the song are written down, etc.). Registering a copyright puts others on notice that the individual or company owns that work, and registering is also required in order to file a copyright infringement lawsuit. For freelancers and business owners dealing with a lot of artistic works (freelance photographers, freelance writers, etc.), filing a copyright registration can be a useful way of protecting the business. For freelancers and business owners that don’t trade in a lot of artistic works (management consultants, freelance construction contractors, etc.), filing copyright registrations is less important and in many cases, unnecessary.
Filing a patent registration can be very expensive and very time-consuming for most business owners. It can also be a very valuable asset to have and can attract investors and commercial partners. If a business owner believes they have a patentable work, they should talk to a patent lawyer early on to understand whether the work qualifies for a patent registration.
Independent freelancers are generally responsible for their own healthcare. As part of the Affordable Care Act (“ACA”), there are now Health Insurance Marketplaces which you can access to shop for insurance. Most ACA plans come in four categories: platinum, gold, silver, and bronze. These are designed to cover 90%, 80%, 70%, or 60% of medical expenses, respectively. If you choose a bronze plan you’ll generally pay lower premiums (the monthly fee you have to pay for your insurance) but your annual deductible (the amount you have to pay towards medical expenses before the insurance coverage kicks in and starts paying your medical bills) may be as high as $8,000, whereas platinum plans can have deductibles below $1,000. While it varies by state, typically you have to enroll in an ACA plan by August 15. The only people who can enroll after that enrollment deadline are people that experience a “qualifying event”. Examples of qualifying events are divorce or loss of coverage (i.e. if you lost your job), among others.
There are some private companies that offer benefits to individuals who do not have employer-sponsored plans available to them. If you know you’re healthy and don’t want traditional insurance, these could be viable alternatives to an ACA plan. Many of these private companies offer low monthly costs to access their network of healthcare providers while charging fees for visits and lab tests. These options tend to be better for people with less medical needs, but they can be worth looking into.
In some cases, you may also be eligible to elect health care coverage through your partner’s employer-sponsored health care plan. Make sure to look into this as well if you are eligible.
Business insurance offers protection against claims against the business and losses incurred by the business. There are many different business insurance products on the market and insurance companies are continuously developing new products to cover different types of risk. In many cases, the decision of whether to obtain business insurance (assuming it is not required by law or by a commercial partner), will depend on the risks facing the business and the willingness of the business owners to cover those risks themselves. Policies operate similar to the way personal health insurance works–there is a premium, usually a deductible, then different limits to the amount of coverage you get for each type of loss. There are online insurance brokers that can help you get a basic insurance program set up for your freelancing business if you think there are some key business risks you want to cover.
There are countless things to worry about when starting a new business. If you can cover most or all of the items on this list, you’ll be starting out with a strong foundation that can support the growth of the business for years to come.
Dave and Todd built Path to be the encyclopedia for freelancers, to help people learn the skills they need to grow their businesses. You can visit Path at www.path.tech and contact the team at team@path.tech.
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