Freelancing – Is it Right For You?

By definition a Freelancer is a person who pursues a profession without a long-term commitment to any particular employer. In business it simply means you want to own your own company, be your own boss and live the American Dream.

Each year more than 1 million new businesses are formed and more than half fail within the first 5 years. In today’s business climate most small businesses are started because large companies have downsized and now outsource much of their work to smaller, more specialized companies.

Freelancing or starting your own business seems like a great idea….right!
Maybe, but self employment is not for the faint of heart and starting a business means long hours, little pay, no 401K, no vacations, and the idea that most new businesses fail looming in your mind.

So, knowing all of this, can you be successful as a Freelancer? Of course you can! You just need to carefully and fully understand what it takes to be successful and you have to objectively ask yourself some important questions:

Do I understand the risk and do I enjoy complete responsibility?
Do I have good organizational skills and a high energy level?
Am I completely dedicated to being successful?
Am I flexible and do I enjoy the challenge of freelancing?
Do I have the “courage” to overcome any obstacles I may encounter
Is there a strong market or need for my product or services?

Okay…..so you have answered all the questions and now you’re ready to forge ahead and make your dream a reality. What’s next? How do I get started? Listed below you will find some of the critical steps necessary to complete before launching your new business.

Create a Business Plan

The business plan is a roadmap for your company. You wouldn’t take a trip to Disneyland without plans so don’t even think about starting a business without one. The plan should be detailed and include capital required, industry intelligence, competitive analysis, pricing analysis, marketing and sales needs, location demographics and any other pertinent information.

Choose the legal form of your business

This can be a daunting task for many new freelancers. The choices are many so let’s examine the ones that apply.

Sole Proprietorship

A sole proprietorship is limited to a single owner (or owner and spouse), who has total control of and responsibility for the business. Further, the sole owner must contribute or borrow all of the capital needed to start the business. Any outside funding sources must be in the form of loans. The sole proprietorship is the simplest business form to organize and is the least regulated. The profit or loss of the business is taxed as personal income and is included on the owner’s individual tax return. The sole proprietor has full legal liability for debts and claims against the business.

The only real disadvantage is you are personally liable for any debts or claims against you or your company.

One advantage is that you’re income is taxed at a personal level which is lower than a corporation.

Partnership

A partnership is a voluntary association of two or more persons acting as co-owners of the business. This form of business combines assets and talents of the partners to conduct the business operations. Each partner can act as an agent for the partnership through business operations, incurring debt, etc. The partners’ personal assets are at risk for all claims and debts of the partnership.
Although a partnership is relatively easy to set up, a Partnership Agreement should be prepared by an attorney to establish the rights and duties of the individual partners. Because a partnership generally terminates when any partner dies or withdraws or when a new partner is admitted, the partnership agreement also describes how the termination will be handled.
A real advantage is having other talented individuals to help you with the business.

A common disadvantage is having a partner that doesn’t share your visions and you do not get along with.

Corporation

A corporation is a separate legal entity that is formed by filing Articles of Incorporation with the Secretary of State. Owners of a corporation are known as stockholders. Each owner invests money or other assets in the new business in return for shares of stock at a predetermined price. The stockholders are at risk only for the amount of money they have invested in the stock of the corporation. The personal assets of the stockholders are not at risk. Because corporations are considered legal entities (or “artificial persons”), the corporation files income tax returns and pays taxes. The corporation may also sue and be sued.
A Subchapter S (or “S”) corporation is a special form of a regular corporation. It is incorporated as a regular (or “C”) corporation, but asks for special permission from the Internal Revenue Service to be taxed as a partnership. In other words, a C corporation and an S corporation are the same legally – they are organized in the same way and have the same legal characteristics. But an S corporation does not pay income taxes. It simply files an information return and the income or loss “flows through” to the shareholders where it is taxed as personal income.
The main difference between a “C” Corp and a Sub “S” Corp is that the income tax paid by the “S” Corp flows through your personal income tax at a lower level than a corporation.
The disadvantages of both are the cost of setting up, the extensive record keeping and a more complicated process.

LLC or Limited Liability Corporation

An LLC is a cross between a partnership and a corporation. It provides for investors, simply called “members” to contribute money or other consideration to the company. These members share in profits and losses and can participate in its management. Generally, each member has one vote, and members decide most matters by a majority vote.
The LLC is created by two documents, “articles of organization” and “operating agreement”. The articles of organization are similar to corporate articles of incorporation and must be prepared and signed by the “organizers” of the LLC. The articles of organization must be approved by and filed with the Secretary of State. The LLC must have a registered office and a registered agent. The registered agent is the person who receives legal documents required to be served on LLCs. The registered agent should be either an individual or a corporation.
The operating agreement is the governing instrument of the LLC and must be adopted by all members. It can contain any provision not inconsistent with law. The operating agreement is similar to the by-laws of a corporation. Generally, the operating agreement should contain provisions related to the conduct of the business and affairs of the LLC, including the rights and powers of the LLC, its members, managers, agents, and/or employees.
An LLC is considered a separate person and as such is entitled to own property. As a person, the LLC can sue and be sued.
The advantages are limited liability to members and less administrative burden than a corporation.

The disadvantage is the complicated process to set up and sharing control with members

Before choosing a structure it would be wise to consult your accountant, a tax attorney or business advisor to determine which entity best fits your needs. If you have not yet established these types of relationships this is a perfect time to do so. Often times starting out as a Sole Proprietor makes sense and then as the business grows you can elect to change the structure.

Obtaining Financing

Funding for a business results from two primary sources; equity or debt. Equity is the owner’s or stockholders original investment and, as such, represents the owner’s cash contribution to the business. This funding can be obtained from various sources, including the business owner’s friends, family, and in limited instances, venture capitalists. Equity funding is dollars, which remain in the business and have no set repayment schedule for disbursement to investors.
Equity is critical to a business in need of obtaining a loan to fund start-up or expansion. As a general rule-of-thumb, equity requirements for a new business fall in the range of twenty-five to fifty percent of the total projected cost of the business start-up. This means that owners may be required to provide up to one-half of the funds needed to open the business
A loan or debt is the other funding source common to business financing. This source becomes necessary when an owner’s equity investment is insufficient to finance the company’s start-up or expansion. These are funds obtained from a third party source, generally a commercial bank, having a defined repayment schedule which stipulates both principal (that portion of a loan repayment representing retirement of the original loan amount) and interest (the portion of repayment which represents the business’ cost of obtaining third party financing) requirements. Loans can either be unsecured or secured. Unsecured loans are based solely on the borrower’s financial strength, without pledging of assets (collateral); while secured loans, also based on financial strength, require pledging assets as collateral for the loan. Secured loans are the common method used by third party financing sources.

Selecting a Location

Many freelancers choose to work from home so location does not come into play. Should you start your business and need a retail or services location you will need to consider where your potential customers are, where your suppliers are, pool of potential employees and state or local regulations required. If you are leasing space make sure you understand who is responsible for what and options you will have for expansion, lease extension or termination.

Promoting Your Business

Most new owners or Freelancers don’t plan to spend much marketing their new business or service. They consider it unaffordable and this can often be a fatal mistake. Marketing and advertising doesn’t have to be expensive. Be creative, join some local organizations, attend some events, do some local advertising but most of all create some type of budget to jumpstart your new venture.

Insurance

Depending on what type of business or freelancing you do will determine your need for insurance. There are many options to consider with product and personal liability at the top of the list. In addition you may want to consider such things like Key Man Insurance, Business Interruption Insurance and Health and Life insurance if you don’t have it. It is usually
cheaper to purchase insurance through your company than as an individual so check with a qualified agent before making any decisions.

Record keeping

Financial records document the operations of a business. Financial records are an extremely important tool for managing the inflows and outflows of a business activity. There are certain required records that must be maintained to satisfy the Internal Revenue Service for income tax reporting. However, the need for good record keeping goes beyond the IRS. Information, which is specific to your business, should be documented in an organized manner to enable you to efficiently and effectively manage your business. If adequate records are kept, peaks and dips in sales are easily determined; cash needs for payroll or outstanding bills are easily counted; and inventory can be controlled by maintaining records.
The simplicity or complexity of the record keeping system is dependent on your personal preference and the needs of the business. For example, an accounting system can be as simple as a 3-ring notebook with notebook paper or be as complex as an entire computerized system.

No two sets of financial records are the same. However, the basic format includes a Cash Payments Journal (checkbook register), a Cash Receipts Journal (receipts book), a Sales Journal, an Accounts Receivable Journal, an Accounts Payable Journal, and a General Journal. The standard financial statements include a Balance Sheet, an Income Statement, a Statement of Owner’s Equity, and a Statement of Cash Flows.

Whatever records you decide to keep bear in mind that someday you will likely be audited and you will need to support your claims with the records you have kept. As far as the IRS is concerned, ignorance is not an excuse and missing or incomplete records are not valid. The penalties and interest resulting from an audit often outweigh the original infraction!

Once you have completed these critical steps you will be well on your to making your dream a reality. Once the mechanics are in place it is all up to you! Your efforts, decisions, vision, enthusiasm and determination will be the driving force behind everything you do.

Some people follow their dreams; others hunt them down and beat them mercilessly into submission.