If you’re reading this book, you have already started asking yourself important questions about how your freelance business should be organized. Maybe you’re just getting started and still working on finding your first clients, building a reputation, and establishing a routine. Or perhaps you’re a seasoned professional with a stable of clients and ample experience. Either way, you face the same questions: Should you conduct your business as an individual or would you be better off forming a legal entity, like a limited liability company (LLC) or corporation? What are the advantages and disadvantages of the different business forms? How would operating a legal entity affect your workload and finances?
One reason freelancers find these questions hard to answer is that freelancing itself has evolved. We all can agree that freelancers are a kind of independent contractor—that is, they work for clients without becoming their clients’ employees. A few industries, like publishing, have used freelancers on large projects for decades. But many businesses and individuals are only just beginning to embrace the freelance market as a source for quality workers. Today, freelancers provide their business clients with a wide range of services that conventional employees used to provide. Individuals, too, are increasingly calling on freelancers to perform services that used to be only available from larger businesses. The pool of potential clients and projects has grown more diverse, offering great opportunities to make a good living.
With opportunity comes risk. Maybe you have litigious clients or work in a high stakes industry where an unsympathetic lawyer is lurking behind every project. Maybe your business involves uncomfortable financial obligations. Or maybe your freelancing income and expenses are raising tax headaches. Organizing a legal entity is one way to get ahead of these and other kinds of risk, and to protect your personal assets.
This book is a short course in the basics of business organizations in the United States, directed specifically to the needs of freelancers. The goal is to give you a sound foundation in basic principles, so you can understand the options and issues you face when analyzing your own situation. Deciding how to organize your business involves not only knowing the kinds of advantages a legal entity provides but also the obligations that come with it.
Overview
Although from a day-to-day perspective business entities can be simple, they have complex contours. This book is organized into four parts. The first part, Chapters 1 and 2, lays the groundwork for the rest of the book. It explores the kinds of risks freelancers face and explains the pros and cons of doing business without a legal entity—that is, as a sole proprietorship. It also introduces some basic ideas about business entities, including what they are, how they are formed and organized, and how they are managed.
In the second part, Chapters 3 and 4, we’ll jump into an overview of the two most common legal entities that freelancers will want to consider as they move beyond sole proprietorships: LLCs and corporations. We’ll explore the potential advantages of these business types, as well as the nuts and bolts of forming and managing them.
The next part, in Chapters 5 through 9, dips into a few broad topics that apply to forming and operating a business using a legal entity. For many freelancers, limited liability will be one of the significant motivations for forming a legal entity. Chapter 5 looks at the limits of the protections offered by LLCs and corporations. Chapters 6 through 8 provide a short introduction to technicalities associated with business names, taxes, and contracts. Finally, Chapter 9 brings together the book’s main ideas to give you a framework for thinking through your business structuring decision using all that you’ve learned in your reading. It includes a chart comparing the features of the different business forms discussed in the book, as well as some guidelines to help you get your thoughts in order.
The book’s last chapter is for freelancers who are thinking about going into business with a colleague or two as one of several business structuring options. This chapter covers a couple entity types that aren’t covered elsewhere and briefly introduces some of the concerns that arise in business partnerships.
A short glossary closes out the book. The glossary is a quick reference for the sometimes confusing terminology of business law. Although the glossary repeats some of the information in the main text, it also goes into greater depth on a few technical topics that may come up during the process of organizing a business entity. I encourage every reader to scan through the glossary.
A Few Things This Book Is Not
I’ve written this book chiefly for freelancers who plan to own and operate their business as a solo operation. To keep things lean, I’ve deliberately minimized or omitted topics that would only muddy the waters for the average freelance business, like employment matters and finance. If you plan to have employees, as opposed to subcontractors, be sure to seek out specialized advice regarding your employer-related obligations. I assume that freelance businesses have limited financial needs. In particular, a business that will raise money from investors (people who contribute money to the business in exchange for an ownership interest in the company) needs specialized, professional advice to avoid potentially serious legal consequences.
Although there are some general principles that apply in most places, the specific rules governing business organizations still heavily depend on the state where the business is organized and the place where it does business. How a given structure will affect your business, personal assets, and finances is contingent on many factors. This book is meant to be an educational resource and isn’t intended to be legal or tax advice. Fortunately, getting detailed, personalized, professional advice from a tax expert and a business lawyer needn’t be expensive. There are good resources online (FindLaw.com and LegalZoom.com are just two examples) for finding qualified professionals in your state who work on a freelance and low- or fixed-fee basis. From a lawyer’s perspective, freelance businesses aren’t particularly complicated or unusual, so for a few hundred dollars you can get the advice you need to get your business started on the right footing. I recommend shopping around to find a professional who as part of the startup process will not just give you advice on how to organize your business, but also resources like form documents and a rundown of future governance obligations. Hopefully after reading this book you’ll know the right questions to ask and will understand the answers.
The ideas we’ll explore will be new for many readers. As with any technical subject, the devil of business law is always in its details. Getting familiar with the legalese can be a little overwhelming, but it’s worth the effort. Just like learning how to ride a bike, learning how to operate a business takes a little patience and work. Once you’re up and running, you’ll find that it’s a lot easier than it seemed at first glance.
Thank you for picking up this book, and good luck with your freelance business!