Freelancing as we know it is being threatened by changes to labor law. If you’re in California, you’re already aware of AB5. Other states already have or are considering similar legislation. The PRO Act was passed in the House in February 2020, and in September of the same year, the Worker Flexibility and Small Business Protection Act was introduced in committee in the Senate.
I’m not going to get into the reasons behind why the freelance economy is threatened in the USA; that’s another article for another day. My opinions are specific and well-researched, so I can certainly debate on facts. But that’s not what I want to do here.
My purpose with this article is to reinforce the understanding that you have the right to work in the manner you choose. You don’t have to be a W2 employee supporting someone else’s enterprise. You can remain a freelancer and build your own thing. But you have to do it the right way.
You can’t simply act like a creative if you want to earn a living from your work. You have to be an owner. The first thing you need to do create a legal business. There are two ways you can do that easily and without spending a lot of money.
Make Your Business Legal
Whether they’re doing it part time or it’s their sole source of income, most freelancers don’t tread their enterprises as a business. What I mean by that is they haven’t obtained business licenses or established a sole proprietorship or LLC, nor taken other actions necessary for starting and maintaining a business.
Now, entrepreneurs in pretty much all other sectors take care of these requirements right off, but, for some reason, creatives tend to ignore them.
Determining the legal structure of your business is one of the top five actions you must take.
There are many ways to legitimize your business: sole proprietor, llc, corporation, partnership, coop.
The most common for independent contractors are the sole proprietorship and the single member LLC.
What is a sole proprietor, what is an LLC, and what’s the difference?
Sole proprietor is the simplest and least costly business structure. A sole proprietor is either a single owner or a married couple.
As a sole proprietor, you are your business, and not in brand only. This means you may have more at stake than if you form an LLC.
If you’re sued by a client, they can pursue your personal assets along with your business assets. There’s no hedge of protection between your business and you.
The majority of freelancers don’t need that hedge and remain a sole proprietorship for decades without needing to form an LLC or corporation.
Actually, I need to qualify that last statement. The majority of freelancers who treat their business like a business are sole proprietors.
To establish a sole proprietorship you need to obtain a business license and file a fictitious business name… a public, published declaration that you’re doing business. The fictitious business statement is also known as a DBA (Doing Business As).
File Your DBA / FBN
A common misunderstanding is that you need to file a DBA only if your business name is indeed fictitious. That if you’re using your own name as your business name ( De’Ondre Duquesne Art, or Dani Douglass Photography, for example) you don’t need a DBA/fictitious business notice.
That understanding isn’t correct. The thing is, if you’re doing business, and you intend to run a legit business, you need to file a DBA to tell the world that you’re running a business. The DBA is essential public notice that you’re the owner of your business.
The DBA also provides a bit of protection from another business using your business name in your sector.
DBAs are filed with your county in person, by mail, or online. There’s a fee involved. In my county it’s $65.00 and renews every 5 years.
Depending on the requirements of your particular county, you may or may not need to publish a notice in a printed newspaper. Yes, public notification in a printed newspaper may be a requirement. The notice needs to be published continuously for a specified period of time. That can be as few as four weeks or as long as 90 days.
PRO TIP: Publish your notice in a small, local or community newspaper. This will keep your costs down. Your county recorder’s office may provide a list of approved publications that accept publish notices.
Get Your Business License
Business licenses are obtained through your city or town, and also your county if you’re in an unincorporated area. License fees are often based on your business income or value of equipment.
Business licensees are renewed every year.
Another thing to note is that you may need more than one business license. For example, I live in the next county to Los Angeles, and have a license in the city in which I live and work, which isn’t Los Angeles.. But because I work with clients located within the city of Los Angeles, I’m required to have a Los Angeles business license in addition to my own city.
This doubling up depends entirely on where your clients are.
PRO TIP: do your diligence to discover what’s required for you. Do your research. Get informed, and also stay current with changing laws and requirements.
Get Your EIN
As a way of separating you from your business and adding some protection to your identity, get an Employer ID Number (EIN) from the IRS.
Pro Tip: Don’t use your SSN when working with clients. For 1099-MISC reporting, provide your clients with your EIN, not your SSN.
This helps your client understand that you’re a business, not an individual. It also adds a protective layer between you and identity theft, and it helps protect your clients from false accusations of worker misclassification.
You can apply for an EIN at irs.gov. It’s free. Simply complete and submit the online application.
Sole proprietors file the usual Form 1040 and attach their Schedule C. Profit Or Loss From Business Or Profession. You pay income tax on the profits from your business.
As a self-employed person, you also pay both halves of payroll taxes. (Current tax law allows you a 1040 deduction of 50% of payroll taxes). lk
So that’s it for the sole proprietorship. Get a business license, file your DBA. Obtain your EIN. Done. And then be sure to maintain your registrations as you go.
LLC stands for limited liability company.
What you’ll want to consider is the single-member LLC.
LLC formation requires registration with your state. You’re required to provide Articles of Organization.
When forming an LLC, your business name is automatically registered, so you don’t need to file a DBA.
As a single member LLC, your company is its own legal entity separate from you. That means you as the owner (AKA member) aren’t held personally responsible for debts or legal actions against your business. Unless, of course, you as the owner are negligent in how you operate.
As owner of an LLC, you can choose how you’re taxed: as a sole proprietor, or as a corporation. The advantages of being taxed as a corporation pertain to the amount you pay in payroll taxes. You’d file a corporate tax return for the LLC and your personal Form 1040. If you elect to be taxed as a sole proprietor, you’ll file your Form 1040 with attached Schedule C and supporting forms.
LLCs are required to file annual reports with their state. Some states, incluing California, require a minimum annual tax.
Choose a Registered Agent
When forming your LLC you’ll need to designate a registered agent. This should be a separate person (not an employee) who will receive correspondence and legal notices on behalf the LLC. It’s the registered agent who is “served” in case a lawsuit is filed against your business. They have to be doing business in your state, have a physical office address in your state, and be open during regular business hours.
If you have a physical address where you’re regularly available during business hours, you can act as your own registered agent. A friend or colleague can also act as your RA if they’re available at a specific physical address during regular business hours.
In any case, an employee should not be the designated hitter to receive legal notices. Either be your own RA or hire someone to do it.
PRO TIP: Find an attorney to serve as your registered agent.
As an LLC, you’ll still need to obtain requisite business licenses. And it’s also wise to use an EIN.
Both LLCs and sole proprietors can hire employees and work with independent contractors. Be sure to know what your payroll reporting and withholding obligations are, and be sure you’re not misclassifying W2 workers as 1099 workers when outsourcing work.
Separate Your Bank Accounts
No matter which legal struture you choose, you need to separate personal and businss bank accounts and credit lines. Under no circumstances should you use your personal accounts for business purposes. This is basic common sense for tax reporting, compliance, and simplicity’s sake.
What about you? Are you operating as a sole proprietor or have you formed an LLC? What are your insights? What questions do you have? Drop a comment or question below. I reply to all bona fide comments. Note: Comments are held for moderation to discourage spam. Comments not approved or determined to be spam will be deleted.