September 13, 2009

Flying solo: To succeed, self-employed need to take care of business

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BOO DAVIS

Joining the ranks of the nation’s 10.4 million self-employed has been widely touted as the antidote to unemployment this year. But becoming a freelancer or entrepreneur requires far more than a knack for building Web sites, remodeling basements or designing eco-friendly baby clothes.

It requires licenses, an accounting system and possibly the services of a good lawyer and insurance agent -- preferably before you start scrambling to meet client deadlines or fulfill customer orders.

“I started researching the business end months before taking the plunge,” says Liz Andrade, who left a full-time design job in 2007 to open her own home-based Seattle studio, CMD+SHIFT Design.

For would-be solo workers with a solid business plan in place and no full-time job standing in their way, this foundation-building stage often can be condensed into a matter of weeks.

First up: Choosing a business structure and securing the necessary licenses. “The LLC (limited liability company) is the cheapest business entity to set up and is also the simplest to maintain,” says small-business attorney Valerie Farris of Farris Law in Seattle.

Many one-person businesses initially opt for sole proprietor status, which involves no cost or paperwork. But as Farris points out, forming an LLC can protect your home, savings and other personal assets should a client sue you.

So what’s involved? Filing online with the secretary of state ($200); obtaining an employee identification number from IRS.gov (free); and having a lawyer draw up an LLC operating agreement ($700 to $1,500 and up, depending on the attorney), Farris says.

While Andrade decided to remain a sole proprietor until her design business grew larger, she did purchase an inexpensive business-insurance policy for her computer equipment. “It just covers me in case of something unthinkable happening to my office,” she says.

No matter which business structure you choose, you must apply for a state business license ($20 fee) and, if you’re doing business in Seattle, a city business license ($90 a year), Farris says. For requirements in other cities, check with your city clerk.

Then there’s the pesky matter of taxes.

“Keep copies of all the receipts you’re spending on your business,” from parking and postage to office supplies and memberships, says Elizabeth Mance, founder of Accountability Services in Seattle, a firm specializing in small-business taxes. “Get QuickBooks or another bookkeeping program. This will force you to track all expenses associated with your income.”

Now that you’re the boss, Mance says, you’ll have to pay taxes quarterly -- by the 15th of April, June, September and January. “At a minimum, put aside 20 cents on the dollar for your federal tax payments,” she suggests.

Ventures making a modest profit receive credits on Washington state taxes, and businesses making less than $80,000 annually aren’t taxed by the city of Seattle, she adds.

Once you make it through this laundry list, marketing yourself will seem like a vacation. Think beyond ads and direct mail, advises Andrade. “Search engines are most people’s phone books these days,” she says.

In other words, a Web site is a must, even if it’s just a simple two-pager stating who you are and what you’re offering.

Maintaining a blog and networking with other freelancers has helped Andrade nab new work. “A lot of what pays off in marketing nowadays has less to do with the dollars you’re willing to invest and more to do with the time,” she says.

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Career Advice, featured, self-employment

5 Comments

Elizabeth Mance on September 13, 2009 6:31 PM | Reply

Time and time again, we’ve seen great ideas and motivation, but no basics in place. A few years later, the business closes – not due to a bad business idea, but because they missed putting some of the building blocks in place early on.

If you’re serious about making a go of being self employed, you need legal and accounting guidance upfront. If you do it on the cheap, be wary of who you hire. There are a lot of people out there who say they provide these services, but do a very poor job of it. Best bet is to work with a referral.

Kristi on September 14, 2009 9:25 AM | Reply

Your article could have been more honest with the would-be self-employed in Washington. "Ventures making a modest profit receive credits on Washington state taxes" should have been "Ventures with modest REVENUES receive credits . . ." The credits on Washington's tax on GROSS business receipts phase out at a gross income that many (like me) may find surprisingly "modest" -- particularly for those in "Service & Other Activities" hit with a 1.5% tax on gross receipts. Other business categories are levied small fractions of that rate (0.275%, 0.48%). Why? I'd love to know the answer.

Shirley Bomgaars on September 14, 2009 9:28 AM | Reply

When I set up my "at-home" business (desktop publishing - Creative Office Guru), I received a letter from the IRS saying I would be paying taxes next in January 2010, but everything I have read says the norm is to pay quarterly. Do I trust the document or scramble to draft a letter & check to the IRS? I have to say, the IRS website is singularly unhelpful in answering any questions in this regard.

Keith Gormezano on September 18, 2009 12:57 PM | Reply

Actually, according to the [url=http://www.seattle.gov/rca/pdfs/BusLicApp.pdf]Seattle Business License Application Form[/url], the fee for a Seattle Business License provided the worldwide annual gross income and/or value of products is estimated as $20,000 or less is $45.00 ($22.50 for half-year fee [issued after July 1]).

As "Dr. QuickBooks & Quicken": I make house calls to help you, I frequently get asked this question about license fees when I come out to set up a new company or start up in, review what they have tried to do themselves, or train them one-on-one on their location on how to do their own bookkeeping.

When you are starting out, you frequently don't know how much you are going to make.

Therefore, in my opinion as a small business owner who has faced this problem, it is better to pay less and make it up if you go over when you file your taxes at the end of the year (and you have the money at that time).

And if you don't ante up, the City of Seattle will notify you when they examine your tax return with them.

Why pay more?

Keith Gormezano on September 18, 2009 1:03 PM | Reply

Kristi, have you considered forming more than one company and applying the small business tax credit to each one?

This could work if you offer more than one type of service or goods or sell in person and on a web site.

Shirley, you might want to call the IRS and ask for clarification. Always get the agent's ID number.

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