Going Legit: Setting Up An Entity For Your Freelance Business

[Credit: NBC’s Parks and Recreation]

(For a quick list of common entities and some Pros and Cons, check out this post.)

In the four months since I started as a freelancer, I have built a stable roster of good clients and have grown my little writing practice to the point that I don’t really have to worry whether I’ll make enough money to pay rent each month.

But despite this bit of success, my business is still relatively immature from a legal standpoint in that I have not yet registered it with New York State. As a result, I do not have access to a dedicated business bank account and, if anything were to go wrong on the job, someone could sue me — personally — for everything I am worth.

And so, to borrow from Jay Z the time he pretty much destroyed Kanye on his own dang song, it is time for me to cease being a businessman and evolve into a business, man. Not only that, but I’ll have to decide how I want to register my business — either as a sole proprietorship, a limited liability company, or as a corporation.

Even without doing any legal paperwork, all freelancers are considered by the government to be sole proprietors, meaning that they are the only owner of a small business in which there is no legal distinction between the owner and the business they operate. As a result, sole proprietors pay income taxes personally and all of our non-business income is potentially on the line if something we do during the course of business gets us sued.

At the very least, it makes sense for virtually every freelancer to level-up his or her sole proprietorship by registering the business name with either their state or local government (each state has different rules as to which branch of government you need to register with. You can click here to find out what the deal is where you live).

To do this, you need to obtain what’s called either a “certificate of assumed name” or a “doing business as (DBA) certificate,” which in New York costs about $100. In exchange, you get two major benefits: the right to legally do business under a name besides your own (i.e. “Aaron’s Very Good Writing Services” instead of “Aaron Taube”) and the opportunity to open a business bank account.

You may be wondering, as I once did, why you should have a business bank account. Since all of the money from my sole proprietorship is ultimately coming back to me, I reasoned, why would it matter whether it is first deposited in a bank account I’m only using for business purposes — especially if my minimal expenses make it easy for me to keep track of everything?

Fortunately, Team Benny’s favorite accountant, Nick Sher, was able to set me straight. As he explained, a major benefit of a business bank account lies not in what you can do with it, but in how it is perceived by others, particularly those who work for the Internal Revenue Service.

By running all of your business income and expenses through a separate bank account, you are creating the narrative that your sole proprietorship is a bonafide endeavor and giving more credibility to the expenses you mark off as tax deductions. Meanwhile, if you have the business expenses you’re deducting right next to the extra Candy Crush lives you bought from iTunes in your personal account, you run the risk of piquing an IRS agent’s interest under examination.

However, one thing a DBA certificate won’t get you is legal protection of your personal assets if something were to go wrong in the course of business. For instance, if you’re a sole proprietor home contractor with a DBA certificate, and one of your employees were to damage someone’s house while she was working on it, the homeowner could sue you and potentially be rewarded with your personal assets as well as the money you have in your business.

On the bright side, you (the home contractor from last paragraph’s hypothetical situation) could possibly shield your personal assets if you were to register your business as a limited liability company (LLC). How much legal protection you can get from an LLC varies from state to state, so it’s best to consult a lawyer to get a better handle on how much of a benefit an LLC might be to you.

A single-member LLC is similar to a sole proprietorship in that you pay taxes personally as opposed to on behalf of your business, but it can be more expensive to register an LLC with your state. According to Sher, getting signed up as an LLC in New York can vary between $800 and $3,000, depending on the county in which you publish notice of your LLC. This estimate includes state formation fees, newspaper publication fees, and the fees charged by an attorney to make all of this happen. The cost of forming an LLC varies by state, and many states don’t require people to publish notice of the entity they have formed.

The other thing to consider with an LLC is how it looks to your customers. For one thing, it makes you appear more professional. For another, it provides long-term clients with a greater degree of assurance that you will not try to claim that they have misclassified you as an independent contractor when you should be getting the benefits of full-time employment. If you’re not sure how your customers feel about this issue, you can always ask them. All things being equal, clients generally feel better issuing a 1099 to an LLC under an employer identification number — which comes with either a DBA or an LLC — than to an individual using his or her social security number.

Ultimately, I decided against registering an LLC for several reasons: I have few outside assets that could be at play in a lawsuit, none of my clients has asked whether I am registered as an LLC, and, right now, I’d really just prefer to have that $800.

The last option at your disposal is to go all out and turn yourself into a corporation. This isn’t really a good idea unless you are planning to build a business with big revenues and a bunch of employees, but sometimes people do it anyway. By registering your business as a corporation, you create a separate legal entity that will be responsible for paying a corporate tax on any profit it makes. As (presumably) the company’s only shareholder, you might have to pay taxes on both the company’s profits and on any dividends you choose to pay yourself. An additional way to pay yourself would be to take a salary from the organization, which requires the cumbersome process of setting up payroll. Either way, if you’re a freelancer looking to service clients, a corporate structure is not the path of least resistance.

However, people may also choose to get rid of this double layer of taxation by electing to turn the corporation into what’s called an S Corporation (otherwise known as an S Corp). By doing so, you eliminate the corporate layer, and all income is then taxed at the individual level, except for in New York City, which does not honor the S election.

Hypothetically, you could earn tax savings by taking a salary that is smaller than the amount of profit your business is generating, but IRS rules require that people take a “reasonable salary” commensurate with the portion of the business’s profits that they are responsible for.

Sher says that a talented accountant can set up an S Corp in a way that optimizes your tax savings each year, but the funds you’ll have to devote to paying that accountant would probably make the whole thing a wash at anything below six figures of income. Add in all of the time and effort you’d have to spend making sure you were in compliance with the law, and it just doesn’t make sense.

Ultimately, the best bet for most freelancers will likely be to get a DBA certificate or to register as an LLC. While both options are good ones, it’s up to you to consider the pros and cons and determine what’s right for your business.

*Written by Aaron Taube on behalf of Benny*

Benny’s Basics: Common Entities for Freelancers

A short guide to common entities for freelancers and independent contractors. For the more in-depth version, head over here.

Certificate of Assumed Name/Doing Business As Certificate


  • You can name your business whatever you want, so long as you’re not violating trademark laws and no one else in your state is using your desired name.
  • You can open a business bank account, making you look more professional to your clients and creating a more transparent system for deducting expenses come tax time.


  • It’ll cost you about $100.
  • Your personal assets are entirely at risk in the event of any kind of legal issue.

Limited Liability Company (LLC)


  • You might be able to shield some of your personal assets from a lawsuit that arises over the course of your work.
  • You look super professional to your clients, and give them added confidence that you won’t try to get yourself classified as an employee.
  • You get a business bank account, just like you would as a DBA.


  • It’s significantly more expensive than a DBA certificate.
  • Even with the limited liability, your personal assets could still be at risk in a legal dispute.

S Corporation (S Corp)


  • You can raise money for your company by selling stock.
  • You might be able to save some money on your taxes.


  • Whatever money you save on taxes will likely find its way into your accountant’s pocket, anyway.
  • You’ll have to spend valuable time and energy making sure you’re taking a “reasonable salary” and that you’re accounting practices are in compliance with the law.

*Written by Aaron Taube on behalf of Benny*


Handy Links:










Benny’s Basics: After You Get Paid

Here’s some quick information from Aaron Taube on what to do after you get paid for freelancing (if you’d like to read the longer version, it’s over here):

  • Properly allocating the money your clients pay you can take just as much time and effort as getting them to pay you in the first place. You don’t need a software solution for this, but you should have some kind of organization to help you keep track of everything.
  • You’ll have to set aside money for taxes. Use IRS Form 1040-ES to figure out what percentage of your earnings you’ll have to pay the federal government — or make a guesstimate of about 25%. Then check your state and municipal taxation departments to learn what you’ll have to pay your state and local governments.
  • You’ll also need to make sure you have money to pay for business expenses like office space, gas money, or the materials you need to make your products. These expenses are used to calculate your working capital.
  • If you have money left over, you may want to look into investing in your future by setting aside additional money for health insurance and a retirement plan.
  • Still have money left? Congrats, you made a profit!

*Written by Aaron Taube on behalf of Benny*

Yay, I got paid! Can I keep it?

[Credit: NBC’s Parks and Recreation]

(Rather check out the shortcuts on this? Check it out over here.)

While it’s only natural to focus on the funds coming in to your freelance business, it’s crucial to make sure you also have a system in place for what you’re going to do with your hard-earned money once you get it.

Yes, for all of the time and energy you’ll spend trying to get clients to pay you and doing your personal accounting, you’ll have to put in just as much effort figuring out how you will give that money away in the form of business expenses, your taxes, and — lord willing — some sort of retirement plan.

For starters, you’ll need to plan on having enough money to pay your taxes. If you’re filing individually, you’ll need to take into account your federal income taxes, your state income taxes, and whatever municipal taxes you might owe.

A good way to take a hack at your federal tax burden is to guess how much money you’ll make this year, and then plug that figure into the IRS’ Form 1040-ES. Every state has its own formula for determining state taxes, so you’ll have to check your state taxation department to get a handle on what you’ll owe. Some places — like New York City! — charge municipal taxes that you’ll have to pay, as well.

Keep in mind, you’ll probably have to pay about 15% more of your earnings than what you were paying the last time you had a full-time job. That’s because of the federal government’s self-employment tax, which requires us freelancers to pay extra because we don’t have an employer making making social security and medicare deposits on our behalf. If you’re not into doing all the math required to fill out Form 1040-ES, veteran freelancer Josh Fruhlinger recommends setting aside 25% of everything you earn for federal taxes, plus whatever you’ll need to pay your state and local governments.

Otherwise, if you carve out a few hours one day to make these calculations, you should be good to go. When I did mine, I determined that if I make $65,000 this year, I will need to set aside a total of 34% of everything I make for taxes. Then, I’ll pay one quarter of my estimated tax burden every 3 months for quarterly taxes. You can read about my first time paying quarterly taxes over here.

If you like, you can make your federal quarterly payments online using the Electronic Federal Tax Payment System. Once you sign up, it’ll take about a week for the IRS to mail you a PIN number you’ll need to log in. After you get it, you can link your bank account to the site and pay your federal quarterly taxes directly to the IRS, without having to worry about dropping a check in the mail.

Once it comes time to pay my annual taxes early next year, I’ll collect Form 1099 from all of my clients, which will let me know how much I made from each customer so that I can calculate and pay my yearly taxes. (I also have a running tally, since it’s entirely possibly one of my clients will fail to send me a Form 1099 at the end of the year, but I still need to report the income.)

If you have a business bank account, you can deposit the money you’re designating for taxes there, but I’ve been using a slightly less sophisticated fix. Basically, every time I cash a paycheck, I put 65% in my personal checking account and 35% (just to be safe) into my personal savings account. The money in my savings account, minus the money I had in there when I started freelancing, is what I am keeping ready for the tax man.

Depending on what you do for a living, you’ll also want to keep some money to invest back into your business so that you can maintain and grow your customer base. If you’re an Uber driver, maybe this means money for gas and car repairs. If you’re a consultant, maybe you need a fund for taking clients out to fancy restaurants. If you’re an artist, you’ll need painting materials.

In all cases, the money you’ll have to invest in your business over the coming year represents your current liabilities, which, when subtracted from the money you’ve made from clients, will tell you what your working capital is. This figure is important because it gives you an idea of how much money you’ll have available to keep for yourself or put into expanding your business.

Keeping track of these work expenditures is important because doing so allows you to lower your tax liability by writing them off as deductions. In addition to some of the expenses I discussed a moment ago, you can also limit your taxable income by excluding money you spent donating to charity, purchasing raw materials you needed to create a product, or paying rent to a landlord for office space. If you work from home, you can even take off a portion of the rent you pay each month, so long as you have a room or a part of your home you use exclusively for work.

While you don’t necessarily have to bookmark money for health insurance, you’re doing yourself a great disservice if you don’t. Prices vary based on what state you’re in, but you can find information about signing up for health care under the Affordable Care Act at healthcare.gov. Plus, you will be subject to a federal penalty if you do not have insurance for three or more consecutive months; so, you’ll end up paying something even if you don’t get health insurance.

If after all of this, you still have some money left over that you don’t need to spend on rent, electricity, and the odd order of takeout sushi, you might also consider putting your money into a retirement plan. As middle-aged people in financial services commercials like to say, this allows you to “make your money work for you” when the collection of stocks you’ve invested in — usually a mutual fund of some sort — goes up in value.

I’ve put some of my money into what’s called a Roth Investment Retirement Account (Roth IRA). Whereas a Traditional IRA would allow me to defer my tax payments until I am ready to take the money out for retirement, the Roth IRA requires me to pay taxes on the money now with the stipulation that I won’t have to pay income taxes on it later. I chose a Roth plan because I expect to be making more money at age 60 than I am at 26, so my thinking is that I should pay my taxes on these contributions now while I am in a lower income tax bracket than I will when I am older and (fingers crossed) wealthier.

A drawback of putting your money into either a Traditional or Roth IRA is that you can only contribute $5,500 a year if you are under the age of 50 — $6,500 if you’re older. Meanwhile, an additional downside specific to the Roth IRA is you might not be able to contribute anything if your income minus certain deductible expenses comes out to $131,000 or more.

Generally speaking, if you make a lot of money and are comfortable contributing bigger portions of your income to a retirement account, you might want to try a one-participant 401k, which has higher contribution limits.

And, if you still have money left over after socking some of it away for retirement, well, congratulations, you’ve found a way to pay your taxes, health insurance, and business expenses — all while making a profit and saving money like a responsible adult. You are all about that freelance life, and you are to be commended for your dominance of the self-employment game.

For everyone else, I hope this guide was helpful in moving you further along the path toward financial security nirvana.

*Written by Aaron Taube on behalf of Benny*

Benny’s Basics: Invoices and Income

You can read about Aaron Taube’s experiences in longer form here, or just check out this cheat sheet on Invoicing and Keeping Track of Income:

  • Keep a scanned copy of your W-9 saved to your computer in order to save yourself some time when you add new clients. Any clients who pay you more than $600 in one year will need the information from this form (your mailing address and Social Security number) to send you a Form 1099, which shows the total they paid you and is needed to file your annual taxes.
  • Before starting a project, discuss with your client how soon afterward you expect to be paid. If they don’t follow through, don’t be afraid to follow up with a late notice or include an additional fee or percentage for late payments. If you plan on including a penalty for late payments, make sure it’s noted on your invoice.
  • If you have some money saved up, try accounting on an accrual basis (rather than a cash basis) to give yourself some control over your balance sheet. The main difference between the two is that using accrual basis allows you to count your money based on the work you’ve done (and invoiced) while cash basis only counts the work you’ve been paid for.
  • Do some research to see if an accounting or invoicing software program is right for you. If you’re not sure, don’t hesitate to test them out with a free trial. You can also find invoice templates and samples in Microsoft Word and, of course, on the interwebs.
  • Whatever you do, make sure you have some form of accounting for what you are owed, what you’ve received, and your expenses so that you can keep track of your business finances and accounting at a basic level.

*Written by Aaron Taube on behalf of Benny*

Getting Paid for Freelancing: Invoicing and Keeping Track of Income

I Want My Money

[Don’t have time to read this right now? Check out the Benny’s Basic short version!]

In the roughly four months since I became a freelance writer, I’ve learned the hard way that finding new clients and doing my actual work is only half the battle.

As more than a few, “Hey, did you guys get my invoice?” emails will attest, getting people to pay you and keeping track of how much money you have can be just as difficult as whatever it is you do for a living.

With that in mind, we thought it might be useful to go through the best ways to make sure you get paid what you’re owed and keep up with your finances.

The first thing I do whenever I start working for a new client is send them a filled-out copy of IRS form W-9. Mostly, this is because almost all of them ask me to do this right off the bat, but even if they don’t, it remains in my (and your) best interests to be proactive about it.

For the uninitiated, your clients use form W-9 to make sure that paychecks are sent to the right address, and most importantly, to help them out fill out form 1099 at the end of the year. Form 1099 serves as a record of all the money each individual client has paid you during a given year, and come April, you’ll need one of them from every company that has paid you more than $600 in order to pay your taxes.

Here’s a pro tip: Rather than having to write up an entirely new W-9 form every time you get a new client, you can scan a copy of the signed and completed form, and save it on your computer as a PDF. So long as you haven’t moved since the last time you completed the form, you can spare yourself some hassle by simply emailing the PDF to your new customers. Given that an outsized portion of any freelancer’s time is spent filling out various forms and contracts, it’s best to whittle down the paperwork process as much as possible.

The next thing you need to do — well, after you’ve completed the work you’ve promised — is to send your customer an invoice for the money you are owed. An invoice is a pretty simple piece of paper or single-paged computer document tallying the different services or products you have given your customer. Depending on what kind of work you do and which state you live in, you might also need to include a sales tax. In New York, professional services, like writing, are not subject to a sales tax, so I don’t include it in my invoices.

In addition to the money you’re asking for, you should also include the address your client should send your paycheck to or your bank details if you prefer electronic transfers. I like to email customers my invoice right after they have made their final edits on a story I’ve written, that way I can get paid as soon as possible without leaving my clients with the feeling that they are being charged for a project that isn’t finished yet.

If you have Microsoft Word, you can use one of its invoice templates; otherwise, you can find a form to download by searching “blank invoice form” on Google. If you’re using an accounting software program, which I’ll discuss in a moment, it’s likely the program will have an invoice function built in.

Everyone you work with will have a different idea of how long it should take them to pay you, so it’s helpful to set ground rules in advance. One common, if frankly sort of annoying, timeline is what’s called “net 30” — meaning that you will be paid 30 days after the invoice is received. You can also mark your invoices “Net 15,” “Net 7,” “Due Upon Receipt,” or really anything else you want. In order to make sure I have money coming in to pay my bills, I always try to keep a couple clients on my schedule that I can count on to pay me relatively quickly. This way, when I do finally get paid by the stragglers, it feels like a nice boost to my bank account rather than something I am desperately waiting for.

If you’re smart, and don’t feel too aggressive doing it, you can even negotiate with your client a late fee for if you don’t receive your check on time (you should make sure to include a note about this on your invoice, as a reminder, if it’s a practice you use). I haven’t felt a need to do this yet, but it is definitely something I am keeping in my back pocket in the event that I don’t feel I can trust a client to pay me right away.

Once you’ve sent out your invoices, you need to figure out a system for keeping tabs on who has paid you and who still owes you money. Otherwise, you won’t know to whom you need to send a follow-up email reminding them to pay.

When I started freelancing, I created a giant spreadsheet that I update every time I take on a new project. Each entry includes the client, the project name, the deadline, and the dates on which I have completed the project, sent an invoice, and received payment. Every couple of days, I go through the spreadsheet in search of projects that I have invoiced but not yet received payment for, and, when appropriate, I’ll send my client a follow-up email checking on where things are at.

However, this method has made it difficult for me to do my accounting. Basically, there are two ways of assessing how much money you have: cash basis and accrual basis. On a cash basis, you determine your finances either by how much money is in your business bank account or, if you don’t have a business bank account, the amount of money in your personal account that came from your business. This method is useful if you don’t have much saved up or you have a lot of business expenses. By choosing cash basis accounting, can make sure you won’t try to pay for something with funds you don’t have.

Since I have a little bit saved up and, as a writer, I have minimal business expenses, I’ve been keeping track of my money on an accrual basis. This means I determine how much money I’ve made based on the value of the work I have completed. For example, if I have $10,000 in my personal checking account (I don’t have a business account) and an outstanding invoice worth $1,000 that I’m waiting for a client to pay, I would say I have $11,000, rather than the $10,000 I would have if I were using cash basis accounting. This decision will also affect how I pay taxes at the end of the year, as I will pay them based on how much money I should have (accrual) according to my books rather than based on what I have actually been paid for (cash basis). In the event that a customer is unable to pay for services I have paid taxes on, I might be able to make a “bad debt” exemption on my taxes the following year as I will have already paid taxes on it in the accrual method.

Before I began using an online software program, I would have to look at my spreadsheet, count up the value of all my unpaid assignments using the calculator on my smartphone. Then, I would need to add that figure to what was in my bank account. As you might imagine, this was a pretty stupid way for me to spend 15 or 20 minutes every couple of days.

Recently, I’ve been using Wave Accounting, a free online software program that sends out invoices (and automated reminder emails!) on my behalf, and calculates how much money I am owed by all of my different clients. By inputting my bank account and credit card information, I can even get a full balance report that adds the money I have in my checking and savings accounts to the value of my outstanding invoices. It has a lot of advertising on it and is a bit clunkier than the paid accounting software programs that are on the market, but given that I’m getting it for free, I’d say it has been pretty great so far.

Other online accounting tools include QuickBooks, which can help you with sales and payroll taxes if they’re applicable to your business, and FreshBooks, which specializes in invoices. The cheapest QuickBooks package that allows you to send invoices costs $12.95 a month (or $10.36 a month if you sign up for a whole year), but it is faster and sleeker than Wave.

Meanwhile, FreshBooks has advanced invoice tracking features and helps you track the time you’ve spent on a given project if you bill by the hour. I really wanted to sign up at first because there’s an image of a “Macho Man” Randy Savage action figure on its homepage, but the service is $19.95 a month if you want to manage more than five clients. This was a bit steep for me, but perhaps you are willing to spend more, or you might find value in the $9.99 option available to people who only plan to invoice five or fewer customers. In any event, QuickBooks and FreshBooks both offer free, 30-day trials, so I’d encourage you to play around with them and see what works for you.

And thus concludes the list of everything I know about getting people to pay me and keeping track of things once they do. If nothing else, I hope this will allow you to reinvest some of the tedious hours you’ve been spending crunching numbers and sending follow-up emails into activities that are at least slightly more rewarding.

*Written by Aaron Taube on behalf of Benny*