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How to Start a Freelance Business

Everything you need to know about legal, tax and contractual paperwork

In Spanish | If you are new to freelancing or thinking of becoming a freelancer, you'll no doubt have lots of questions, especially about the legal and regulatory paperwork you need to obtain and manage throughout the business year.

Businessman in discussion with colleagues, tips for starting freelance business

Take steps to set up and maintain your freelance business legally. — Corbis

Freelancing, particularly if you are unincorporated, is one of the least paperwork-intensive forms of business ownership. Nevertheless, you are still a business and you need to be sure you have the right licenses or permits, make estimated tax payments on time, report your earnings each year and deal with client paperwork such as contracts, nondisclosure agreements and more.

To help you stay on top of your obligations, here's a breakdown of key legal and regulatory processes, plus important "business-ready" documentation you'll need when dealing with new clients.

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Legal and Regulatory Must-Do's

Here's what you'll need to do to ensure that you set up and manage your freelance business legally:

1. Get the right licenses and permits – All businesses need some form of license or permit to operate in their state, county or city. In all likelihood, your freelance business is operated out of your home. So you may need a Home Occupancy Permit and a General Business License. You can get both from your local government website. Or simply use SBA's Permit Me online tool for information about the licenses or permits you may need based on your ZIP code and business type. Be sure to obtain these before you start doing any business.

2. Register your business name – If you want to name your business anything other than your given name, then you'll need to register a "Doing Business As" name with your local government. This guide explains how. If you use your own name, skip this step.

3. Pay estimated taxes – This one often comes as a surprise to freelancers, who may be used to having their taxes withheld by an employer. As a freelancer, it's your responsibility to pay Uncle Sam and your state revenue agency almost as soon as you earn income each quarter. If you expect to owe $1,000 or more when you file your annual return, then you must pay estimated taxes on income.

4. Complete a W-9 form when you get a new client – When you sign an agreement or start work with a new client, it's likely they will ask you to complete IRS Form W-9 (you may have to ask them for it). Filling out a W-9 is straightforward: Provide your name and Social Security number, or your "Doing Business As" name. The client holds this form and doesn't send it to the IRS; it's a formal certification by you that your tax ID (SSN) is correct. The form also asks if you are subject to backup withholding – most taxpayers are exempt.

5. Annual tax reporting: The 1099 form – If you've earned more than $600 in a year from a client, they have to report these payments to the IRS through Form 1099-Misc. Your client will send you a copy by the end of January each year. Be sure it's accurate — does the amount the client stated he paid you match your records? You don't have to do anything with the form other than file it in your records and use it as a reference when you report your annual income to the IRS. Think of it as the freelancer's equivalent of the W-2 form.

We've deliberately excluded incorporation as a must-do legal and regulatory step for freelancers. Incorporation isn't a legal must-do. While it has its benefits, it can also have cost disadvantages. To help you decide if incorporation is right for you, take a look at the Should You Incorporate Your Freelance or Consulting Business? guide. SBA's Incorporating Your Business guide is also a useful reference.

Essential Business-Ready Documentation for Freelancers

Here's a list of some of the day-to-day documentation and paperwork that you will likely need or encounter as a freelancer:

1. Cost estimate and proposal documents – Give your business a professional touch by creating your own branded template for project quotes and proposals. You can pay a graphic designer to create many of your basic business documents and graphics, or use freely available templates in software such as Microsoft Word and Google Docs.

2. Contract documents and NDAs – Most clients will have their own contracts in place for independent contractors or freelancers. Be sure to read through the terms carefully. Don't be afraid to question anything that doesn't make sense or is irrelevant. A Nondisclosure Agreement (NDA) is usually included and is pretty standard. It requires you to agree to the client's legal rights for protecting company knowledge or information you may have access to during the course of business, as well as intellectual rights relating to the work you produce.

3. Statement of Work – Even if you have a client contract in place, many clients will also ask for individual Statements of Work (SOW) for each project. It's a good idea to volunteer one even if they don't ask for it. A SOW is a project-specific agreement outlining the mutually agreed scope of work and the time frame for its completion. It sets expectations, deliverables and the price. It may also include information on resources needed for the project, including roles and responsibilities on both sides. The secret to a good SOW is to avoid being vague — if it's too broad and nonspecific, you may end up with a dispute. Once the SOW is agreed and signed, you are ready to begin the project.

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