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—hours you’d rather spend on 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 ask yourself these 6 legal questions. They’ll ensure you’re prepared in case any legal conflict arises and will also get you thinking about your business from a legally savvy perspective.
The question sounds philosophical, but 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 your business structure (at least in the US). 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 receive a 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, if the business is sued, it won’t affect 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, forming an LLC or corporation is a sensible move.
Your name—whether you choose to stick with your own or go by a business name—should show how you want to be perceived by clients and the marketplace. Naming your business after your own name only works if you plan on remaining a one-person business. But, if you anticipate bringing others on board over time, you probably want to create a separate brand for your business.
If you incorporated or formed an LLC for your business, you had to create a business name to do so. However, even if you haven’t implemented a formal business structure, legally you can use a business name by filing a “Doing Business As” in the US.
Are you okay with an oral agreement, a quick email arrangement or a contract in writing? Whether you outsource or take on a new project yourself, having a signed document establishes the expectations of a project. A contract protects you in case a problem arises and also ensures everyone is on the same page in terms project scope, deliverables, payment, timeline, etc.
Before you start drafting 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.
With more businesses of all sizes using contractors and freelancers these days, it’s important to understand the legal distinction between a 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 or 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.
Self-employment involves a number of risks and responsibilities. For instance if you’re a freelancer, you’re wholly accountable for satisfying certain performance expectations and deliverables.
As long as you maintain a high business performance, you’ll be less likely to deal an unhappy or disgruntled client. With that said, you should still establish procedures beforehand in case an issue arises. Your contract or work agreement should set the expectations for the work to be executed (including the number of allowable revisions, timelines, etc.). And, don’t forget to keep a paper or email trail that documents all your correspondences with your clients.
No matter what industry you operate in, the success of your business ultimately boils down to how much money comes in and how much goes out. This is what keeps your business on the ground and running, so it’s important to be well acquainted with your company’s financials. If you use FreshBooks, you can use reports for tax time and document all your expenses along the way. That way, if there’s ever a dispute over charges, you’ll have all the documentation needed to back you up.
This is an archived post from the FreshBooks Blog and was originally published in February 2014.