Congratulations – you took a huge step by deciding to work as a freelancer. The thing is, now you’re not just a freelancer…
You’re also a business owner.
This not only creates a number of opportunities for you, but it also exposes you to certain risks. So you need to protect your business, and yourself personally. Below are some suggestions to help grow your business and protect yourself.
You can begin by choosing a legal entity like an LLC or corporation. If you’re thinking, “I’m not big enough for that yet” consider this: If you’re taking payment for any work done, you’re big enough to think about it now.
Three reasons. One: You’ll appear more credible and reliable. This can make you more attractive to larger companies who have higher value projects. Two: If someone sues you, it can help protect your personal assets. Three: Setting up a legal entity can save you money on taxes, depending on how you set it up.
If you’re considering a Limited Liability Corporation (LLC), keep in mind there are several options. Each has its advantages and disadvantages, so be sure to consult a professional when deciding which is best for you. The three most common are:
We’re often told that if we’re ever sued, the LLC ensures only the company—not you personally—is liable. Because your LLC creates what’s often called a “corporate veil.” But what many business owners don’t realize is it’s still possible to pierce that veil.
When the veil is pierced, a business creditor can collect corporate debt by suing you and other individual members. Yes, this means they can ignore your LLC and go after personal assets like your savings, your car, and your home. But there are ways to protect yourself and reduce business risk. You start by reinforcing the corporate veil. This requires making a clear separation between you personally, and your company.
The five tips below can help you make the separation very clear. They’re so easy, you may already be doing some of them now. Read on to make sure you don’t miss anything.
1. Set up a business bank account
When you have a separate personal bank account from your business, it helps show your business is legitimate and distinct from your personal finances. Keeping separate accounts also provides other benefits:
2. Get an EIN
EIN stands for Employer Identification Number. It acts like a Social Security number (SSN) for your business. Having an EIN further establishes your business as separate from your personal identity, and can provide the following benefits:
3. Get a business license
A business license or registration may be required to comply with tax and legal requirements. Whether a business needs a license usually depends on what type or size of business, and where it’s located—not whether it’s an LLC.
Local laws for business licenses vary, and states, cities and counties sometimes require separate business licenses. If you’re tempted to forego this, think twice. For instance, if you run a business without a license in Washington, you can face fines.
Business licenses are updated annually. But keep in mind, your license can change as your business changes. In some locations, your license can change when:
|TIP: Check with local, state or regional agencies for help. Many government agencies are setting up helpful websites with information on tax and licensing requirements. For example, New York State’s business startup website shows you all your business requirements and gives you direct links to the appropriate agencies.|
4. Update your operating agreement
An operating agreement is a document describing how your LLC is governed between members and how funds are contributed and distributed. To remain valid, it should be reviewed annually.
An operating agreement isn’t always required for LLCs. But even if the entire company is just you, it’s still a good idea to keep an updated operating agreement on file. For taxes and liability, an operating agreement further separates the business owner personally from the business.
What’s more, if your LLC doesn’t have one, it’s subject to the “default rules” of the state in which the LLC is organized. This lets the state tell you how to dispose of your business assets in case of a claim or your passing.
Every state has different requirements on what the operating agreement should include, so you may want to consult a professional for advice.
5. Hire a registered agent
A registered agent is your company’s point of contact with the state and other businesses. Companies that create legal entities usually provide this service for an additional fee, which saves you time spent searching for and hiring a registered agent on your own. Another option is appointing one of your company’s members as the registered agent. But consider hiring a professional registered agent if:
By following these five tips, it can help your business look more valid from a legal standpoint. Therefore, courts may be more willing to agree that your business is entitled to legal protection as a company.
Not only will you be better protected, but it also shows prospective clients that you’re running a legitimate business. This may help them feel more comfortable choosing you over someone else. And it can help you attract business from larger companies. The good news is, you don’t have to figure everything out on your own.
There are numerous products and services available that are designed to help freelancers maintain and build a thriving business. As an Upwork member, you may qualify for discounts to set up your business entity, determine whether you need any business licenses or registrations, and much more.
Disclaimer: This article doesn’t address all legal or tax issues for freelancers, and it cannot and should not be relied upon as legal or tax advice.