Starting a Freelance Business: 5 Legal Obligations You Need to Know

Starting a company as a freelancer offering your services is an excellent idea. You can be your own boss and decide how to do things. Don’t expect it to be all fun and games, though. There are essential details you have to bear in mind, especially the legal aspects of freelancing. Take note of the following crucial legal concerns to avoid problems as you move ahead.


Secure a suitable and legally available name for your business


Choosing an appropriate and catchy name for your business is a given. The name is a significant part of your brand identity, so it has to be easy-to-remember and an excellent representation of your brand. You also have to make sure that the name you choose does not have legal issues.

Avoid legal troubles involving business or brand names used by other businesses. Take your time to do some research. If you realize that another company has already been using the name you chose, you will have no choice but to change the name of your business.

You are unlikely to win a legal battle against a company that can readily prove that they were the first to claim and use a business name. It’s not only inconvenient to be forced to rename or rebrand your business after years of operation; it’s also costly. You may have to start from scratch  reestablishing your online presence and reputation.


Register your business and get the necessary licenses


After deciding on a business name, you can proceed to the registration process. All businesses must be registered with the proper authorities. Even if your business only operates online, it may not be legitimate without registration.

Generally, you need a general business license for a freelance startup operated from your home. You may also need a home occupancy permit. Additionally, you have to go through the “Doing Business As” filing unless you will do business using your legal name.

You’ll have to do these at your local government office. You can get the forms you need to register by downloading them from the government website.

If you want to avoid the hassles of completing all the legal requirements, some companies can help you. You can focus on the more important aspects of your business by letting LegalZoom or Swyft Filings, for example, handle the legal matters of registering your business. These are not law firms, but they provide services to help businesses comply with legal requirements efficiently.


Comply with employment laws


Many people tend to equate freelancers with independent contractors. These words are often used interchangeably. But they have substantial differences in the legal sense.

Not all freelancers can be considered as independent contractors. The correct classification depends on the laws in the jurisdiction where your business operates. Some states have stricter rules or requirements before they can consider you as a third-party contractor working independently from the company that hires you.

In California and Massachusetts, for instance, the following conditions must exist before someone can be classified as an independent contractor. The worker must:

  • be free from the hiring company’s control and direction.
  • not work within the regular course of business of the company hiring them.
  • perform the tasks assigned to them as an independent occupation or business activity.

Most states have a less prohibitive test in determining ‘control’. The question focuses on whether or not the hiring company directs the how, where, and when of the work or project. If the business unilaterally decides how the worker works, the worker cannot be considered an independent contractor.

It’s important to address the question of employee or independent contractor treatment to avoid committing legal violations. While your freelance business may not be held accountable for incorrect classification, you can still suffer adverse consequences from the possible legal issues arising from it.


Get acquainted with non-disclosure agreements.


Non-disclosure agreements or NDAs are commonplace in the freelancing industry. Many companies that hire independent contractors want to hide the fact that most of their operations rely on freelance workers. More importantly, they want to make sure that insider information or trade secrets don’t leak to outsiders.

NDAs are confidentiality agreements. However, they cover more than just the information exchanged between the freelancer and the hiring entity. The freelancer may have obtained other sensitive information indirectly in the course of working for a company. Such information can also be protected by the NDA.

There’s nothing seriously objectionable about companies that force freelancers to sign NDAs. Freelance business owners must be well-versed with the dynamics of non-disclosure policies. Violations of these agreements can result in hefty fines and even more serious legal issues.


Pay the correct taxes


Taxation is one of the most important legal considerations every freelance business has to pay attention to. Freelancers are not exempt from taxes even when they only serve clients abroad. Income generated domestically and abroad is subject to taxation.

In the United States, freelancers who earn more than $400 per year are mandated to pay a self-employment tax: 15.3% of the first $118,500.00 you earn in a year. The percentage is based on 12.4% required for social security and 2.9% for Medicare.

The calculation of your taxes becomes more complicated as you earn more from your freelance engagements. If you earn more than $118,500 in a year, it is advisable to hire a tax expert to guide you. A tax professional can also help you legally minimize the tax you pay and maximize the amount of income you keep for yourself.

The takeaway

Pursuing a business venture as a freelancer is an exciting way to make a living. However, there are legal concerns to take into consideration. Your business should be properly registered and licensed. Also, you need to take note of relevant federal and state laws, especially regarding taxation, employee/independent contractor classification, and agreements with clients.

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