Freelancing During the COVID-19 Crisis
Category: Business Formation | COVID19
May 18, 2020

Due to COVID-19, businesses have laid off or furloughed more employees than at any time in our lifetimes.  With ‘job security’ exposed as a myth, many of these former employees are now becoming true entrepreneurs by monetizing their skillsets through freelancing, consulting or other ‘gig economy’ opportunities.

Technology has made the ability to start your own business with little to no capital investment easier than ever.  You no longer need an expensive office or a large investment in enterprise software or hardware.  You can now easily work from home, from a coffee shop, from a coworking space – your office is anywhere with a WiFi connection.  Also, now that most software tools are available as “software-as-a-service” subscriptions, you can have the same tools as large companies for a very reasonable (and scalable) investment.

Below are some things inspiring entrepreneurs should consider when starting their new venture.

Obligations to Your Existing or Prior Employer

If you are planning to go full time as a freelancer, make sure you don’t have any agreements with your existing or prior employer that might restrict your ability to run your business.

You most likely have an agreement that prohibits you from using your employer’s confidential information or proprietary technology.  Also, you may be prohibited from soliciting your employer’s customers or employees, or that restrict you from competing against your employer generally (although these non-compete provisions may be unenforceable if they are overboard or place an undue burden on the employee from earning a living).

If you are planning on running your freelance business part-time, you should make sure your employer doesn’t have any restrictions on you doing so.

Check your employment contract (including your employer’s Employee Handbook) carefully for any caveats before taking the plunge.

Form an LLC

While you can operate your freelance business as a sole-proprietor, it is often a good idea to form a single-member LLC for your business.

Most importantly, you can limit your personal liability exposure to some extent by using a LLC.

For example, a disgruntled client could potentially be able to come after your personal finances if you were not working under a business entity.

Additionally, depending on your financial situation, you might be able to save money on taxes using a S-Corp tax election.

Further, LLCs provide a better business structure for your freelance business – you can get a business EIN, open a business bank account, better account for expense deductions, and more.

Finally, the LLC structure makes you look more credible to potential clients.

Paying Taxes

Freelancers are liable for their own tax obligations. This means federal, state, and local governments will look to you to pay your income taxes, social security taxes, Medicare taxes, local taxes, and more.

A good rule of thumb is to set aside 30% of all net revenue so you can pay your taxes. You should pay quarterly estimated taxes and, during tax season, you’ll likely have to pay a bit more unless you overpaid your estimated taxes.

The best way to manage all of this is to speak to an accountant to get you set up properly.

Contracts with Clients and Subcontractors

Using written contracts with your clients is the best way to protect your freelance business. Your client contract template should include the following:

  • Payment obligations
  • Scope of services
  • Ownership of intellectual property
  • Confidentiality obligations
  • Termination rights
  • Miscellaneous legal terms

As you build your business and your workload increases, you will likely use subcontractors. Your subcontractor agreements will look a lot like your client agreements, but they will need to be drafted differently since you are the hiring party and not the contractor.

Your subcontractor agreement template should include the terms identified above, but it’s critical to incorporate terms relating to intellectual property ownerships and other provisions to clarify that you do not have an employer-employee relationship.

Specifically, you should ensure your template language states that you own the work product the subcontractor is creating and all associated intellectual property.

Starting a freelance business can be intimidating, but it is also incredibly liberating. If you have any questions about how to set up a freelance business for success, contact Bridgeford LLC today.

Need help forming an LLC or considering starting your own business? Call your friends at Bridgeford today!

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