If you are like most freelancers or self-employed professionals, you’ve probably skated by without diving too deeply into the legal aspects of your business. After all, there are only so many hours in the day—and you’d rather spend your time closing deals and making clients happy. But whether you’re just starting out or have been managing your business successfully for years, I suggest you run through these six legal questions. They’ll help make sure you are ready should any legal conflict arise and get you thinking about your business from a fresh, legally-savvy perspective.
1. Am I a person or a business?
While this may sound like a philosophical question, there’s actually an important legal distinction. Are you a business owner or a freelancer? Do you want there to be any separation between you (your personal bank account, savings, credit, etc.) and the business? Or do you like the simplicity of keeping everything mixed together?
The difference boils down to business structure (at least in the U.S). If you’re a sole proprietor, there’s no distinction between you and the business. In fact, you are the business. You won’t be able to get any kind of business line of credit, and most importantly, if you’re ever sued or have trouble paying your bills, you are personally on the hook.
When you create an official business structure (such as an LLC or a corporation), there’s greater legal separation between you and the business. Your business now exists as its own entity…it can grow its own credit, get its own bank account, and the business will be sued not you personally (which means your own savings and other assets are most likely safe). If you are worried at all about being sued or getting a business loan, then forming an LLC or corporation is a sensible move.
2. Should I use my personal name or business name?
Whether you choose to freelance under your own name or create a business name gets to the heart of how you want to be perceived by clients and the marketplace. Sticking with your own name might be fine if you plan on being a one-man/one-woman show for your entire career. But if you anticipate bringing others on board (whether as employees or sub-contractors), then you’ll want to create a separate brand for your business…even if it’s just by adding “& Associates” after your name.
If you incorporated or formed an LLC for your business, then you had to create a business name. But even if you didn’t create a formal business structure, you can still legally use a business name by filing what’s called a “Doing Business As” in the U.S.
3. How do I want to use contracts?
Are you okay with an oral agreement or quick email arrangement, or do you prefer to get things in writing? Whether you are hiring freelancers or starting a new project yourself, you are going to want some kind of signed document that establishes the basics of the work. A good contract can protect you in case a problem arises, and also makes sure everyone is on the same page from the start in terms of expectations for project scope, deliverables, payment, timeline, etc.
We’ve already discussed some of the basics for what should be in a contract, as well as an NDA. Before you need to use one, start thinking about how you are going to walk through the contract process: will you require a paper version/hard signature or do you want to handle everything electronically? Have a good stock contract available that you can easily modify, to speed up the process.
4. Contractor or employee?
With more and more businesses of all sizes using contractors and freelancers these days, it’s important to understand the legal distinction between contractor and full-time employee. This is true whether you are the one being hired or doing the hiring.
The legal classification (at least according to the IRS) boils down to independence and control. Contractors have the freedom to determine how a certain job should be done. Ask the following questions: who decides when and where to do the work? Who chooses the tools/equipment to use? Who defines how the work should be done or the sequence of the steps?
Be careful about the amount of control and supervision you exert over a contractor. For example, make sure your contractors can set their own hours and choose the best way to do the work. Otherwise, the IRS may ask you to provide benefits and pay payroll taxes.
5. What if a client is unhappy with the quality of work or finished product?
Self-employment involves some risks and responsibilities that employees typically don’t assume. For example, an independent contractor is accountable for satisfying certain performance expectations and deliverables.
Most likely, you’ll never have to deal with the sticky situation of an unhappy or disgruntled client, but you should have a few procedures established beforehand in case an issue arises. Your contract or work agreement should set the expectations for the work to be performed (including the number of allowable revisions, if applicable). Keep a paper/email trail that documents your client correspondences—particularly documenting any delays on the client side that will impact the overall schedule.
6. How do I track my income and expenses?
No matter your industry or line of work, any business ultimately boils down to how much money comes in and how much goes out. There are countless reasons to have a firm grip on your company’s financials…including for reporting your taxes, as well as determining how much you owe or should charge a service provider. Document all hours and any expenses for each project, and keep/scan all relevant receipts. That way, if there’s ever a client dispute over charges, you’ll have all the documentation needed to back up your side of the story.
About the author: Nellie Akalp is the CEO of CorpNet.com, an online incorporation filing service, where she helps entrepreneurs Incorporate, Form an LLC or File a DBA for their businesses. Connect with Nellie on Google+
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