As I’ve noted in the past, I’ve been generating a decent amount of freelance income over the past couple of years. After I resigned from my “real” job in 2008, I actually took the plunge and started freelancing as a full-time job. Today I want to talk a bit about how I got everything set up.
Making it legal
My first priority was to make sure I was doing everything on the up-and-up. Even though my freelance business was incredibly small (now it’s just small), I registered with my city to get a business license. I also had to fill out some additional paperwork because I was doing business under a name different than my own. Everything was straightforward and painless.
I also had to decide on how I wanted my business organized. The main options were:
- Sole proprietorship: A sole proprietorship is the simplest business entity. From a legal standpoint, this sort of business is owned and run by an individual, and there is actually no legal distinction between the individual and the business.
- Partnerships: A partnership is a type of business entity in which multiple partners own the business and share in the profits and/or losses. There are some potential tax benefits to partnerships over corporations, but the owners of a partnership might be exposed to greater personal liability as they would as shareholders in a corporation.
- Limited Liability Company: LLCs have been a popular choice for some bloggers and freelance workers because they are very simple to operate while still providing personal liability protection.
- Corporation: A corporation is an institution that is granted a charter establishing it as a completely separate legal entity from its owners/shareholders. There are multiple types of corporations, each with their own advantages and disadvantages. In most cases, however, forming a corporation is overkill for a freelancer.
I ended up sticking with a sole proprietorship. Aside from nailing down the right business structure, it’s important to apply for any necessary city or state business licenses or permits (if applicable). Many municipalities have resources available to point you in the right direction. There are also services like Legal Zoom that you can help take care of the paperwork if you’re not comfortable with this sort of thing.
Setting up a business bank account
By far my favorite part of my freelance work is getting paid. I’ve set up a business bank account to handle this income. While it’s only me, having a business account can be very helpful for keeping your finances in order, and might actually be required if you wish to maintain the liability protections associate with certain business structures.
When searching for the right bank, I considered some features that I wanted to have:
- No monthly maintenance fee
- $0 required minimum balance
- Free online BillPay service
- Conveniently-located ATMs
I also knew I wanted to have a local branch for handling any problems that might come up. I decided to go with Wachovia and opened a free business checking and savings account. I just need a simple account without a bunch of extra features that would add on unnecessary fees.
The process of opening my business checking account was fairly easy. I just had to bring in my business paperwork, ID, etc. into the local branch. I opened my savings account a little bit later. I also set up an EFTPS (Electronic Federal Tax Payment System) account to pay my estimated taxes on a quarterly basis. Paying taxes throughout year is important because I want to avoid an underpayment penalty.
Building a solid source of income
If you’re looking into starting a small business, you should really check out the Small Business Administration’s website. It’s a fantastic resource and can help answer many of your questions. It also pays to check our your local SCORE chapter to receive some valuable information on how you need to expand your small business.
I hope that by writing a bit about my freelance business, you can see that it’s possible to have another source of income outside of your day job. Taking control of your finances means more than just cutting expenses, it includes building your income.
Have you done anything to build a side income? If so, do you have any tips or tricks to share? Please leave a comment.