When you have a talent for web design, starting your own business can be an exciting venture with many rewards. However, the initial stages are crucial for your success, and there are a number of tasks to take care of, legal and otherwise, before accepting your first client.
Before getting your business going and taking on clients, take time to map out a plan for your company. This is your opportunity to figure out your goals and how you will get from an idea to an actual business. Not only will this put you on the road to success, it may also be a requirement for securing funding should you need financial assistance from banks or other lending institutions.
Your business plan should include information such as:
You might decide you want to start your web designers as a sole proprietor. This is the simplest legal entity and does not require any filings with the state to form. As soon as you begin work and accept payment, you are in business as a sole proprietor. The downside with operating your business this way is that you are personally liable for the debts and liabilities of your business. While it may seem like the chances of personal liability with web design work are remote, many people don’t want to take that risk and choose instead to form a business structure that provides personal liability protection.
One of the most popular business entity choices is a limited liability company (LLC). Like a corporation, an LLC provides business owners with personal protection from the business’s debts. For many, an LLC is the preferred choice because it provides more flexibility with management and fewer ongoing corporate compliance requirements than a corporation. In addition, an LLC, unlike a corporation, is a pass-through entity. This means the profits and losses pass through to the owners who report them on their personal tax returns. There is no tax at the business entity level. A corporation on the other hand pays taxes at the corporate level and then again when money is distributed to its owners. This is so-called double taxation.
While LLCs and corporations are the most common business structures for web designers, there may be other options you may want to consider depending on your situation. With corporations, you can choose an S corporation which is taxed as a pass-through entity. Or if you have a business partner, you could form a general partnership or a limited partnership. To learn more, see our article about types of business structures you can form.
Even if you have personal liability protection through a legal entity, you will want to make sure your business has adequate insurance. An insurance agent can help you figure out what insurance you need. Before looking into your insurance needs, it helps to familiarize yourself with basic insurance terminology.
If you have a physical location where clients come visit you, you will likely want general liability insurance to protect yourself from slip and fall accidents on the premises. This insurance can also cover claims for things like copyright infringement and damage to a client’s property. You may also want errors and omission insurance. This provides coverage if there are claims related to your work performance, such as failing to meet a client’s specifications for their website. Cyber liability insurance--which protects against lawsuits concerning data security breaches--has become increasingly important for web designers.
Before opening your doors, you will want to get the finances of your business in order. It is important to keep the assets of the business separate from your personal assets, both for your personal protection and to make it easier come tax time. You will want to open a separate bank account for your business, and you may also want a business credit card. Set up an accounting system, whether that means hiring a bookkeeper, purchasing accounting software, or, at a minimum, tracking income and expenses in a spreadsheet.
Depending on which business entity type you select, you will have to register your business with federal and state tax agencies. Because state law varies, check with your state’s tax department to see what is required.
At the federal level, you may have to obtain an Employer Identification Number (EIN). This is a simple application that may be completed for free on the IRS website. Think of an EIN as a social security number for your business. Corporations, multi-member LLCs, partnerships, and businesses with employees are required to have one.
Even for sole proprietors, there are benefits to having an EIN. Some banks require one to open an account and you don’t have to use own social security number on W-9 forms or any other forms, keeping your personal information safe.
You may need to apply for a business license before accepting clients. While web designers generally do not have the same licensing requirements as professionals like lawyers or doctors, your state or county may require all businesses to have a license. Check with your city and county clerk’s office to see what’s required before you start doing business.