Whew! We’ve covered a lot of complicated topics, with plenty of details to sort through. Now is a good time to take a step back and look at the big picture. Remember, the goal of this book is to give you a foundation for making informed decisions about how to structure your business. There are a lot of ways to go about this. The best way is to talk to professional advisers—a business lawyer, a tax expert, and perhaps an accountant—who can answer your questions and, most importantly, raise issues that you haven’t thought about. Because a freelancing business probably isn’t a particularly complicated organization, it shouldn’t cost a fortune to get sound, basic advice. Nonetheless, you can save time and prepare to make better choices by organizing your thought process.
Here are some steps to help you consolidate what you’ve learned from reading this book for answering the two big questions: should I form a legal entity for my business, and if so, what kind? At this point it’s worthwhile to put aside some of the book’s topics that aren’t germane to these central questions. Choosing a name for your business is fun, but it can wait. Also, it’s worth stepping away from all the technical details the book has thrown at you about how LLCs and corporations are run. If the answers to the really big questions point toward a certain business form, it will be worth the effort to master the little administrative details, no matter how obscure they seem now.
Step 1: Evaluate Your Business Risk
The decision about whether to form a legal entity for your business could be couched in another way: why shouldn’t I operate as a sole proprietorship? As we covered in Chapter 1, the main reason for forming an LLC or corporation is to manage your personal risk. When it comes to business entities, risk management is primarily about two things: taxes and legal liability. Understanding your risk, and your appetite for risk, is a vital part of the decision you face.
Think about the kinds of risk you face in your business. Do you work with litigious clients? Do you work on high value, sensitive materials? Do you travel a lot for your business? Think about how your business will develop in the future. If your goals will take you into riskier territory than you’ve explored so far, then that should factor into your choices. Putting your company on the hook is much easier if it is already organized when you start a big, risky project.
Think about your tolerance for risk. Do you have property that you want to shield from potential business creditors, like a home or retirement account? How willing are you to expose your personal assets to the risks you expect to face?
Step 2: What Business Form Best Manages Your Risk?
We looked at the three main forms a freelance business can take: sole proprietorships, LLCs, and corporations. Because the state where you live can have such a big influence on which of these forms is best for you, this book probably can’t give a definitive answer about which one of these is best for your situation. But if we put aside the small stuff, like how these entities get formed and managed, we can get a big picture sense of them. Use the information in Table 9.1 to compare the key characteristics of the different business types.
Of course, this table is only a starting point. You may have other ideas, especially after doing your own research about your state’s rules. It might help you to put together a table like this with your own categories and concerns. After pulling together your table, chances are you’ll have a pretty good idea of which direction you want to go.
Table 9.1 Legal entity comparison
Step 3: Think about Your Existing Business
If you have been operating as a sole proprietor for a while, chances are that your business has accumulated some assets (hard assets like a computer, and soft assets like client testimonials) and has some administrative details (accounting records, websites, service contracts). For a lot of freelancers, their biggest business assets will be their personal brand and their stable of existing clients. How will you address your approach to rebranding under a new legal entity, so your existing and potential clients know that the professional behind your sole proprietorship will be operating under a new name? Do you have long-term contracts that you’ll want to move into a new entity? If you do, what do they say about transferability?
Also think about how you currently manage your business, and how that might need to change if you form a legal entity. Are there steps you’ll have to take to get organized, like finding a new bank for business purposes that could take you some time? Will you need a new website or e-mail address?
Step 4: Map Out Costs and Consider Taxes
Before settling on a business form, it’s worth doing a rough analysis of your expected income and expenses. On the income side, think about how much you expect to make each year. Then, make a list of your anticipated routine business expenses. This can start with your state’s fees for forming a legal entity and keeping it in compliance. Typically, this information is readily available on a state’s Secretary of State website. Will you be buying health insurance coverage through your company? How about liability insurance? What kinds of service contracts and other business expenses do you anticipate your company having?
Once you have an estimate of income and expenses, consider first if your expected income makes you comfortable with the costs of owning a company. Then, think about if you might benefit from your company being a tax-regarded entity. If a big expense is tax deductible for a C corporation, but not deductible for an S corporation, it could turn out that having your company pay separate taxes is actually an advantage. If you’re struggling to figure these things out, track down a tax expert and run your situation by them. Making good choices at the start can save you a ton of money in taxes over the long run, so a professional’s fees will be money well spent.
After going through these steps, hopefully you’ll know more than enough to make the right choice for your business. The good news is that once you’ve made a choice and gotten organized, the tedious work of setting up your company will be behind you. You can turn to the fun of running your business with the confidence that your risks are under control and your bottom line isn’t smaller than it ought to be.
Further Reading and Resources
One reason this book exists is that finding clear, concise information about organizing a freelance business is like drinking from a fire hose. If you’d like to track down more specific information to suit your situation, there are good resources available. Freelancer organizations like the Editorial Freelancers Association can be a great resource for printed materials as well as advice from peers. My starting point for reliable, plain language guides on legal topics is Nolo (www.nolo.com). Nolo puts out dozens of books covering all manner of business law topics. The best resources will be tailored to your state’s requirements. You can also probably use the vocabulary from this book to find advice on specific topics posted online from lawyers in your state, though you’ll have to sort through a lot of potentially confusing information that isn’t relevant to you.
If you plan to keep costs down by trying to organize your business yourself, without involving a lawyer, it is important that you find a reputable and reliable source for template documents, especially an LLC’s membership agreement or a corporation’s bylaws. These documents can be pretty simple in a single-owner situation, but it’s critical that they not only meet your state’s current requirements, but also don’t add unnecessary complexity to your company’s governance requirements. Also, remember that forms available on the Internet aren’t always updated as laws change. You can save yourself a lot of money and headache now by paying a little for someone to help you put together the right paperwork.