How To Start Freelancing
This article is written for those who are looking for a practical guide on how to start freelancing but it also can be used as a "check" for existing freelancers and even entrepreneurs to be sure that your foundation is solid. This article is not for those looking for insight on market research, business plan creation, or funding. We are going to ensure that your foundation is solid from the beginning. Discussed will be entity creation, accounting set up, domain purchases, EIN obtainment, legal and insurance needs, and more. Here are the 9 steps:
Create Name / Check Availability
Purchase Domain
Create a Professional Email
Form Legal Entity
Obtain EIN
Open Bank Account
Set Up Accounting System
Obtain Necessary Permits and Licenses
Consult with Small Business Professionals
These may seem like a lot but the beginning steps of all nine of these could be completed in one morning or afternoon. Please do not overlook these steps as not completing them could set you up for failure in the future and the further down the road you get, the harder it will be to reactively complete these steps.
Create Name / Check Availability
There are 3 types of names that could be created. DBA’s, Entity, and Trademark Names. We will be discussing entity classifications more in step 4 so check that out as well.
DBA: “doing business as” or trade name. A DBA is not legally protected but you can register a DBA as a sole proprietor and get an EIN and bank account. Multiple of the same DBAs could be used in the same state so no need to check state availability for your desired name. A DBA is easy to create through your state’s Secretary of State website. If you are a freelance writer and you make business cards with the name “Writing Success” and you do not have an LLC formed, you must create a DBA with the state. You would not need a DBA if you are a freelancer operating under your own actual name.
Entity Name: How the state identifies your business. Check your state site for availability. Check state requirements for the name of an LLC or Corporation because some have to include LLC, Limited, Corp, or something along those lines after the name. You can take advantage of dba’s again in this case. You could create Tom's Graphic Design, LLC and then create a dba of just Tom's Graphic Design if you desire. You can have multiple dba’s under one LLC (make sure the business is under the same umbrella as the LLC), I wouldn’t create an LLC for a freelance writing business and then create a dba for your side gig of selling cookies online. With the same entity with multiple LLCs, you can have multiple “businesses” providing similar services without creating multiple EINs, bank accounts, and tax filings. An example of this is Susan’s Marketing Services, LLC as the entity name with the dba’s Susan's Website Design, Susan's SEO Plus, Susan's AdWord Pro, etc for multiple services.
Trademark: Trademarks can protect the name of your business, goods and/or services on a national level. Whether or not you want to register a trademark, you should search your desired name with a trademark database tracked by uspto.gov (United States Patent and Trademark Services). Along with this, you should be checking the availability of these names at the state and federal levels as well as domains and social handles. We will be going over the specifics of the domain and social handles in the next step.
2. Purchase Domain and Social Handles
The first step as mentioned earlier is checking the availability. There are a few ways to do this. You can search the domain yourself by simply typing the domain on Google or use services like name.com or GoDaddy. If your preferred name is taken, you can offer to buy it from the domain owner. People have differing opinions on the importance of this nowadays but generally, if you can help it: go with .com when possible, keep it short, easy to say/spell and avoid hyphens if you can. If interested in the SEO game, you could use some preferred keywords in your domain name in order to solidify that. This is a whole other discussion but some quick keyword ideas can be found on services like Google Ads/Keyword Planner. After finding an available name, the next step is the actual purchase of the domain name. I don’t want you to get too bogged down on this as any of this can be changed at any time in the future but I want you to have a basic understanding of the workflow. The workflow is basically Domain Purchase to Web Hosting to Website Builder Software. Even if you are not interested in creating a website at this time, you can take advantage of some deals. For example, at the time of writing this, Bluehost is offering Web Hosting for $2.95 per month, and included in that is a free domain name. To buy a domain name, use a service such as GoDaddy or BlueHost. If you are only interested right now in holding down that domain name and using it for email you can continue on to the next step now. Just keep in mind that your domain will be listed on your email so if you do not have at least a one-page brochure type website created, that could seem incomplete to the customer. If you are interested in building a quick website I can give a few directions to take here. Keep in mind again that anything regarding this is easy to change in the future so please do not get too bogged down here. This is a common occurrence of many people first creating a business, myself included, in taking too much time fine-tuning all the details of their website/ logo, etc. You can, for example, get a starter hosting package and create a quick brochure type website and then, later on, switch to a more powerful hosting solution and pay someone to create you a customized e-commerce website all using the same domain. To create a quick website the first step is purchasing some Web Hosting (If it is not already included in your domain name purchase package). Web Hosting is basically borrowing a company’s servers to run your website. A good option here is Bluehost. Next is choosing a Website Building Software. These are tools that provide easy plug-and-play website creations. Examples include WordPress, Wix, and Squarespace. There are many tutorials on Youtube but many of these website builders are fairly straightforward. You can easily and inexpensively create a quick brochure-style website that can be upgraded in the future if necessary or desired. Things change but generally if you want to save money and have maximum flexibility, use services like GoDaddy, Bluehost and WordPress and link them. If you don't mind spending a little more and just want an easy all-in-one solution, go with Squarespace. No matter what, the most important thing at this stage is at least just securing a domain.
3. Create Professional Email
You can use your fancy new domain to set up a professional email. You could go with GeorgeConsulting@gmail.com but George@AtlasConsulting.com is a much more professional option. Also, this setup lowers the chances of your sent emails being sorted as “spam”. You could also get fancy with emails like: support@AtlasConsulting.com sales@AtlasConsulting.com, etc. Doing this is easy but not always necessary, especially for freelancers because it can feel inauthentic, but just so you know this option is there. A good service to check out here is GSuite. You can create this email using your new domain as well as have access to all of Google’s collaborative apps like Google Forms, Sheets, Docs, Meet and Drive which is a great solution for your cloud storage needs. Whatever service you choose should walk you through how to link this. Have one tab open with your Web Hosting settings and another with your email provider (Gmail, Outlook, etc). You will basically just copy and paste some links into your hosting settings.
4. Form Legal Entity
The main options to consider here are: Sole Proprietor, Partnership, LLC, and Corporation. I will go over a few pros and cons and basic explanations of each. Keep in mind, I am no legal professional and after reading this if you still have some doubt as to which to choose, please reach out to a small business tax attorney and accountant.
Sole Proprietor
Sole Proprietor entities are easy to set up, low cost, allow easy exit, allow you to create a DBA, and allow you to obtain an EIN (we will discuss EIN later). However, the huge con with this formation is no “corporate veil”. Essentially, there is no legal separation between you as an individual and a business. So, if you get sued, declare bankruptcy, have unpayable debt, etc, and are only set up as a Sole Proprietor, your personal assets are completely vulnerable. Also, it could be difficult to get outside funding with a Sole Proprietor entity if that’s the route you want to take. Also, your state could have higher requirements in order for you to obtain certain licenses, permits, etc. There are very few scenarios where I would recommend a Sole Proprietor entity. Maybe if you are a freelancer on the side but even then, I could argue that forming an LLC taxed as a Sole Proprietor is a worthwhile move.
Partnership
Good for partners going into business. Partnership entities are useful as they allow you to create partnership agreements that delegate with percentages percent of ownership, profit sharing, liability, etc. If forming this entity, you should talk with a small business attorney and create legal agreements for this relationship including a partnership agreement.
Limited Liability Company
When in doubt, go with an LLC. An LLC is inexpensive and easy to form. For my state, $50 and a quick, online application at the Secretary of State’s website. Side note, please consider DIYing it and not paying someone to provide this service for you. Some companies charge hundreds of dollars to form your entity when you can realistically do this online in 10 minutes max. This of course will differ from case to case. An LLC most importantly creates that corporate veil. Forming an LLC and separating your business and personal finances are some of the best ways to protect yourself. Also, an LLC is flexible. You can create an LLC and then choose to be taxed in different ways which can be changed at any time. You can choose to be an LLC taxed as a: sole proprietor (default), or taxed as an S Corp. Having the ability to be taxed as an S Corp can save you lots of money in taxes. The main way this savings occurs is with employment tax. Basically, if you are an LLC taxed as a sole proprietor all of your income and expenses are passed through the business to your personal tax return. No matter how much you did or didn't actually pay yourself in wages. However, with an LLC taxed as an S Corp, you are now considered the owner and are considered for tax purposes as an employee of the company (even if you are the only employee in the company). So, you can pay yourself a wage and only that wage is subject to Social Security and Medicare tax, and the remaining profit can be distributed as net earnings, not subject to this tax. An LLC entity taxed as an S Corp is powerful because you get tax benefits of being taxed as a company/employee without having the fees, meetings, lack of control, etc of being formed as a corporation. Talk with your tax attorney and CPA to see when it may be a good time to elect to be taxed this way. Usually, starting as an LLC taxed as a sole proprietor makes the most sense until the business is bringing in a certain amount of profit at which point it’s best to switch to elect to be taxed as an S Corp, again, saving you lots of money in taxes. The reason is going from being taxed as a sole proprietor to an S Corp adds some complexities that may be unnecessary at the beginning stages of your freelancing career. But, if you feel confident in tracking your wages correctly and don't want to change down the road, by all means, set this up now!
Corporation
A Corporation entity formation is for growing businesses looking for large amounts of capital funding. There are some tax benefits in certain situations. You also have the ability to add a board of directors and issue shares for capital gain. A Corporation formation also comes with high liability protection. Some downsides are a loss of some control. You must also do certain things like taking meeting notes and there is generally increased complexity.
5. Obtain an EIN
I believe any and all businesses, even if just a small-time freelancer set up as a sole proprietor, should obtain an EIN. An EIN is basically your business ID number for taxes, bank accounts, credit, etc. Without an EIN, you will have difficulty opening up a business bank account and applying for a business credit card. Also, on some forms (1099 and w9 for example if you are a sole proprietor) if you do not have an EIN, you will need to provide your personal social security number and this should be avoided at all costs. You can get your EIN online at IRS.gov and it is free to get. Again, I would not usually recommend paying someone to do this as it can be done online quickly and for free.
6. Open a Business Bank Account
Again, for any business, I believe you should open up a separate business checking account. This further increases your corporate veil which is always a good thing. Even if you have an LLC formed, it may be difficult to protect your personal assets if you are using your personal bank account to run your business. Also, for financial tracking and bookkeeping, separating your business and personal funds is always recommended. There are some free and easy online business checking account solutions out there (Novo & QuickBooks Cash for example). Usually, even if not free, these accounts could be set up for a low cost. You can go cheap (free), easy and online, or go to a local branch to build a personal relationship with your banker which could benefit you if down the line you may be looking for business loans through a bank, the choice is yours. If needed/desired, you could also use this time and your new EIN to apply for a small business credit card. You can do a quick Google search and check out NerdWallet for the best credit card deals at the time and apply for those cards on the credit card company’s websites.
7. Set up Accounting System
You've already completed a big first step in regards to your freelancing accounting by opening a separate business bank account. To take it further, you want to be sure from day 1 that you are tracking your numbers correctly. This is required for tax purposes of course but it can also provide you with an up-to-date status of where you are with your business. Most small businesses (82% according to US Bank) fail due to poor cash flow management. Cash Flow Management begins with actually keeping track. Checking your bank account balance oftentimes isn't enough. Before we go into specifics, if you know that accounting and bookkeeping are not strong skills of yours and/or it bores you enough that you realistically may not keep up with it as you should, look into outside support. This could be having someone help you with the initial system setup or delegating the task completely. For those looking to tackle this themselves, I would say to first look into a bookkeeping program. You want something that is relatively scalable as to not have to switch and learn new programs as you grow but also something that is within your price range. This balance here is different for everybody. The cheapest option could be something like just using an Xcel spreadsheet and a good scalable solution would be a cloud-based bookkeeping system such as QuickBooks Online. The choice is yours of course but let me make an argument for the monthly cost of a cloud-based program versus something like just keeping physical receipts in a shoebox and using Xcel. Cloud-Based Bookkeeping software is scalable, more nowadays than ever before. Usually, the packages are set up this way as well, you pay a certain amount for the entry-level features, and then if you need more features if you scale you pay a little more all within the same software. This takes away having to learn a whole new system every time you scale up. Also, these softwares save you a lot of time and effort. They can automatically bring in transactions from your business bank account, you can set rules for how these are categorized and even upload scanned receipts via your phone or email and the software reads the receipts automatically and attaches them to the associated expenses. You can also integrate outside apps and software into these programs in order to create a streamlined and customized workflow based on your specific needs. They are also of course cloud-based so you can access your books from anywhere and easily provide access to employees, tax accountants, and bookkeepers without having to meet or mail anything physically. This allows you to be location-independent yourself and expands your hiring pool from local talent to anyone, anywhere in the world. The initial setup for these workflows may be daunting but the long-term payoff is more than worth it as you move forward. Even if you don't care about detailed expense tracking and budgets but just want simple books that are tax compliant, I would still recommend taking the time and resources to set up an expense tracking system or look for outside support. Doing this allows you to remove the hours every month where you would be working on this stuff. Doing stuff like this and checking emails may make you feel productive, but it is really taking time and energy away from you creating the deliverables that actually move you and your business forward.
8. Obtain necessary licenses and permits
Different business scenarios will require different permits and licenses. A Certificate of Occupancy, for example, is needed if you have a physical location. I would suggest going to SBA.com and/or visiting your local SBDC or Chamber of Commerce in order to get insight as to which permits are needed and how to obtain them. Measure twice, cut once. You don’t want to be caught already in operation while missing some of these mandatory permits and licenses.
9. Consult with Small Business Professionals
There are many professionals out there whose job is to support you in this venture. Some examples I am talking about here are: Bookkeepers, Tax Accountants, Small Business and Tax Attorneys, Insurance Brokers, etc. You should really be using this step at any point throughout this process if are unsure about anything. Many of these professionals provide free initial consultations so you can use that time to build a relationship with them in case a situation arises in the future where you may need their services and you be able to pick their brain to sure that you are absolutely set up correctly in every regard to your business. You can discuss with an attorney about any legal forms which may need to be created for your business including: Operating Agreements, Non-Disclosure Agreements, Employee Contracts, etc. You can also speak to an Insurance Agent about coverage including: Business Property, General Liability, Business Income Insurance, Worker’s Comp, and more. Having said this, for some freelancers this is completely optional and you should just keep it simple. Instead of paying a lawyer to create Client Operating Agreements, use a free (or cheap) signature software like Dochub or Adobe and create a simple template that you can easily find with a quick Google search yourself to use. Instead of hiring attorneys and insurance agents if you decide to hire employees, look into hiring contractors instead, or use a cloud software like Gusto that handles most of this stuff for you. Again, this varies from person to person and depends on your available resources and comfortability with risk.
Well, there you have it, how to start freelancing. If you follow these steps, you should have an extremely solid foundation for your freelancing career. These steps may be boring and tedious but are important in ensuring the success of your business.
*Mandatory this is not legal advice disclaimer. This is all my opinion and you should consult actual professionals for your legal, insurance, and tax needs*
Thank You For Reading!