freelance business

3 Ways to Protect Your Freelance Business

What does the state of freelancing look like in the U.S.? According to a report from online freelance marketplace Freelancer, freelance job openings increased over 25% between the months of April through June 2020. This study revealed that, in a COVID-19 landscape as well as post-COVID landscape, the state of work and how we work is trending toward new patterns.

Many individuals are becoming more interested in independent work. Freelancing, which has been steadily rising as a new work option, is likely to continue trending — and to become the norm for many, especially as unemployment runs rampant during the pandemic. A 2017 study from Upwork predicted that the majority of the U.S. workforce will move toward freelance by the year 2027.  

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As a freelancer, be sure to check the following items off your to-do list to protect yourself:

Incorporate or form an LLC

The default entity formation for small businesses is a sole proprietorship. A sole proprietorship is an affordable entity that allows the business owner to exercise complete ownership of the business. The owner, as a result, is responsible for everything good and bad that happens to a business.

Sometimes having this much responsibility isn’t ideal for a freelancer. In the event of an unforeseen circumstance, such as accidentally losing a client’s personal information, it is possible that the client could serve the freelancer with a lawsuit. The freelancer’s personal assets, like their car and house, could be at risk, along with the assets of the business.

The best way to keep this kind of “what if?” scenario from happening is to form a legal entity for the business. An entity formation, like a corporation or limited liability company (LLC), provides the business with limited liability protection. This type of protection creates a separation between personal and professional assets.

Let’s return to the imaginary scenario where a client’s personal information has been compromised. He or she decides to serve your business with a lawsuit. However, since you incorporated as a legal entity, your personal belongings will not be used as collateral. Limited liability protects these assets, providing you with extra peace of mind that your personal liability is secure.

Wait! Which entity should I form, an LLC or corporation? This decision is up to the needs of your small business. You can follow our tips to figure out which entity to incorporate as and reach out to a tax or legal professional with any additional questions.

Related: 5 Reasons Why You Should Form an LLC for Your New Business

Filing for a tax ID

A tax ID also goes by a secondary name: an employer identification number (EIN).

What is an employer identification number? This is a nine-digit number issued by the IRS to identify and track employer tax accounts. It resembles a social security number (SSN) in length and because it is a unique number. Freelancers may choose to use this number on business paperwork instead of using their SSN. This helps safeguard the SSN and still allows you to identify the business.

Beyond basic paperwork, why else would one need a tax ID? Having an EIN can be a huge asset for freelancers. You may open a business bank account with this number. This ensures your personal finances are kept separate from those of the freelance business. Later on, when you feel ready to hire employees, you can also use an EIN. Businesses are required to obtain an EIN before hiring employees. With an EIN, you may also help establish pension, profit sharing and retirement plans —for your employees and even for yourself.

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Register trademarks

Your freelance business will have several trademarks associated with it. Some of these might include the business name, symbols or designs, logos, catchphrases or taglines, and even brand mascots. These unique words and symbols declare who your business is and what it does. You’ll be using these marks frequently, so it’s important to register the trademark as soon as possible.

What happens if a trademark is not registered on a federal level? Unfortunately, an unregistered trademark can put freelancers in a vulnerable position. Their marks may be plagiarized by other businesses or used without their permission.

On the flip side of the coin, a freelancer could get into hot water if they are using what they believe is an unregistered trademark. Without conducting a name search, it is possible that their trademark may already be filed and in use by another company. If this company finds out that your business is using their mark, even on an accidental basis, it could lead to trouble.

Don’t run the risk of using an unregistered trademark. Conduct a name search to make sure the trademark you’d like to use on behalf of your business is available. You may find out it is already registered with another company or pending registration elsewhere. If so, you’ll need to create a new trademark that isn’t in use.

Once you know this mark is available, then you may go ahead and register the trademark at the federal level. Remember to pay the proper filing fee with your application and submit the application with the appropriate office at your local Secretary of State.

What else do freelancers need?

This is a brief summary of some of the ways freelancers may protect themselves and their growing businesses in the coming year.

Conduct due diligence in areas that pertain to your freelance business. You may also need to obtain certification in certain industries, business licenses that allow you to operate your company, and establish a website and social media handles to begin marketing your business. Check in with your local Secretary of State to find out what else is required of your business. Make sure you are able to stay in compliance to keep your business in good standing with the state, and you’ll be on your way to successful side income in no time.

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