Formalize Your Freelance Business

Follow these steps to take your business to the next level.

1. Consider a formal business structure.
One of your first tasks is to decide on the ownership structure for your business: sole proprietorship, partnership, limited liability company, or corporation. Most likely, you're already a sole proprietorship, by default, but that may not be the best choice when it comes to paying taxes or personal liability. For more information on selecting the right structure, see Choosing the Best Ownership Structure for Your Business.

2. Name your business.
Do you already have a business name or have you been using your own name? If you've been operating under your own name, you may decide to select a trade name that customers will remember. If you do, you should register it as a fictitious business name; see Registering Your Business Name. You'll also have to make sure that the name you choose (or a similar one) isn't already being used by another competing business. If it is, you could find yourself in legal trouble. And, if you plan to create a website, you'll want to make sure that your business name -- or some obvious abbreviation or acronym -- is available as a domain name. For more information on naming your business, see Choosing a Business Name FAQ.

3. Consider office space.
Have you been working out of your home? Working at home has its benefits -- you won't have to pay office rent, spend time commuting to work, or even change out of your pajamas. On the other hand, an outside office provides a more professional setting for your business, helps you separate your home and work lives, and may allow you to work more efficiently. For information on finding and renting space for your business, see Your Business Space & Commercial Lease.

4. Get licenses and permits.
Depending on the type of business you start, you may need to get permits and licenses from federal, state, and local governments. Many cities and counties require every business -- even single-owner, home-based operations -- to get a license or permit. You may also have to get a sales tax permit (often called a seller's permit) from your state. For more information, see Licenses and Permits for Your Business.

5. Shop for insurance.
Insurance is the single greatest expense for many independent contractors. Unlike employees, who are often covered by their employers' plans, you will need to find -- and fund -- your own coverage. Among the policies you may need are health insurance, disability insurance, coverage for your business property, liability insurance, auto insurance, and workers' compensation coverage. If you plan to work out of your home, see Home Business Insurancefor more information on insurance issues.

6. Set the right prices.
Review your pricing schedule and compare it to what others in your area charge for similar services. Then, factor in what the customers you'd like to work for are willing to pay. For more help with pricing, see How Much Should You Charge for Your Services?

7. Use a basic bookkeeping system.
Self-employed people have to keep careful track of their business income and expenses -- to stay on top of late-paying customers, to prepare tax returns, to take advantage of every available tax deduction, and to see how their business is doing overall, among other things. Start with a basic system that will be easy to manage, including a business checking account, income and expense ledgers, and records to back up your tax returns. For more information on tracking your business finances, see Bookkeeping and Accounting Basics.

8. Market yourself.
Marketing your services widely -- through advertising, maintaining listings in business directories, joining professional groups, creating promotional materials, and so on -- will help you reel in more customers. Marketing serves another important purpose, too: It shows the IRS and other agencies that you make your services available to the general public, which will help you prove that you are really an independent contractor. See Preserving Your Status as an Independent Contractor for more ways to prove that you're self-employed.

9. Plan for tax time.
Because taxes won't be withheld from your paychecks, you'll have to set aside enough money to cover your tax bill -- which you'll have to pay in installments, as estimated taxes. You'll also want to keep careful track of your business expenses, so you can take every tax deduction available to you. For more on estimated taxes, see Paying Estimated Taxes; for loads of information on tax deductions, see Deduct It! and Home Business Tax Deductions, by Stephen Fishman (Nolo).

10. Follow the rules if you hire employees.
If you hire employees to help in your business, you legally become an employer -- which means that you'll have to get an Employer Identification Number (EIN) from the federal government; withhold, report, and pay taxes; and provide workers' compensation insurance, among other things. For more information on requirements for employers, see Hiring Your First Employee: 13 Things You Must Do.

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