• Advice

Moving from freelancer to business owner? 3 questions to ask yourself

At some point during your freelancing life, you may have thought about scaling up or going from being an independent contractor to an actual business. This is not a minor decision as it has implications for other variables in your life, including marketing, revenue, and taxes.

As someone who used her freelancing skills as a springboard to start a business, I thought that it might be helpful to ask you a few practical questions. The answers of which may save you some headaches, sleepless nights, and unwarranted stress. As with anything that involves your time, talent, and resources, I recommend that you look at this through various lenses to determine if any, or all, of it applies to you.

So, what do you need to consider before leveraging your freelancing career to launch a business?

Is being a ‘business’ necessary?

This is, by far, is one of the most important questions that you need to ask yourself. My decision to create a business was determined by the mission and vision that I had for my company. Once I personally navigated the world of 1099s, I started envisioning having a company with employees. I wanted to eventually bring on board other freelancers so that I could increase my volume and go after larger contracts. I met with several people who owned businesses to determine if an LLC, Inc, or S Corp was the best option for me.

Based on tax shelters, my industry, and future earning potential and projections, I decided that an LLC (limited liability company) was the most viable option. With an LLC, the members of the company are not personally liable for the company’s liabilities or debts. I researched what my state required—keep in mind that every state is different—thankfully, the process was straightforward so I was able to file all of the necessary paperwork myself. Others have told me that some states are far more complicated and they have hired others to do the paperwork for them.

Obviously, there is not ‘one size fits all’, so be sure to do your research on the front end.

Who is liable?

There are several wonderful things about owning a company, but there are also responsibilities or potential liabilities that you will take on. To be honest, you don’t want to position yourself to be the subject of someone else’s scorn or lawsuit. In this light, your status as a company offers you some protection as an individual that being a freelancer does not.

Also related to liability is acquiring an EIN (federal employer identification number). It is a unique nine-digit number that you can apply for via the IRS website. In a nutshell, the EIN is like your company’s social security number. It is primarily used for identification purposes, but it is also highly beneficial for other reasons. You can use your EIN to open a business bank account, acquire business credit, secure additional funding, and pay your independent contractors.

Here's how to apply for an EIN tax number.

Can you afford additional ancillary services?

If there are two services that you don’t want to skim on, it’s your legal and accounting services. I recommend retaining a CPA because as you scale up, your expenses will increase as will your paperwork and your need to save and systemize your accounting practices.

It’s also definitely worth your while to invest in a lawyer. Before seeking out legal counsel, uncover as much information as possible to determine what your state’s laws are and how they will affect you if you formalize your business. Doing your homework will help a lawyer advise you. Lawyers are also great resources when you are either generating or entering into contracts.

Some business owners will opt to pay their accountants and lawyers a monthly retainer, while others will use a fee for service payment method. Regardless of which method you use, you need to be prepared for the extra overhead costs that you will have. Obviously, will be some additional costs involved with shifting from being a freelancer to a business, but these two are definitely non-negotiables.

Lastly, I would recommend that you think about where you want to be 3 to 5 years from now. This will help you to determine if you are in step to making those goals a reality. If becoming a business is your pathway to success then I highly recommend that you consider doing it.

Also, keep in mind that I know of several people who are gainfully employed who have not formalized their services. They have opted to maintain their status as self-employed or sole proprietor because it’s not beneficial for them to do otherwise. So, in a nutshell, this really is a personal choice.

I’d love to hear from you: Have you thought about starting a business?

Tyra Seldon Tyra Seldon is a former English Professor turned writer, editor and small business owner. Her writing addresses the intersections of race, gender, culture and education.